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What disclosure am I entitled to when I consider buying a franchise?
If you are looking to buy a franchise from a franchiser, the franchiser must give you two crucial documents mandated by the Federal Trade Commission (the "FTC"): (1) a written disclosure statement (or "offering circular") that sets forth certain information about the business to be franchised, and (2) proposed franchise agreement or contract. A third attachment, an "earnings-claim" statement of the franchiser, may or may not be furnished, at the election of the franchiser. All the above documentation, including the earnings-claim statement, is contained in a single form (as opposed to separate documents), commonly referred to as the "Uniform Franchise Offering Circular" (UFOC). (Most franchisers prefer the UFOC document since the document, with some modifications, is acceptable in all states.)
The disclosure is supposed to be written in plain English, clearly, concisely, and in narrative form. Even so, it sometimes requires a lawyer to interpret what is really being said -- and what is not being said -- which you should be cautious about.
You are entitled to the disclosure material either at the first face-to-face meeting with the franchiser or 10 days in advance of the signing of the actual contract or paying money, whichever happens first.
The fact that the disclosure is government mandated does not mean that the offering has the approval or recommendation of the government, or that the information is complete or accurate, or the franchiser is reputable. Or that the government checks for truth, or how good a franchise is or risk (this is despite a "risk factors" section in the document). Any confirmation, verification, and assessment of the contents are the responsibility of the buyer of the franchise. While misrepresentations, fraud, or omissions in the disclosure statement may result in civil and criminal liability to the franchiser, as a prospective franchise buyer you should be more interested in making sure you get what you bargain for, than having to sue someone down the road.
For a quick read on franchise operations, click here. |
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