Here is some helpful information for franchisees or those considering becoming a franchisee. For additional questions about franchising contact Barry Kurtz to schedule a consultation.
- What is a franchise?
- What are the advantages of franchising
- What types of franchises can be offered?
- What is a Franchise Disclosure Document (FDD)?
- What information does a FDD contain?
- What things should I do before I purchase a franchise?
- Are Franchise Agreements negotiable?
- Where can I get a company's pre-sale disclosures?
- How can I find out about complaints against a company?
- What is Barry Kurtz's experience in representing franchisees?
Franchising is a method of expanding a business where the franchisor licenses its trademark and business system in exchange for payment to the franchisor for the right to operate the franchise using the business system and trademark. Business is then conducted in accordance with the franchisor's standards and specifications. Franchisors generally provide franchisees with pre-opening training, post-opening training and overall support along with the right to use the franchisor’s trademark and system.
Purchasing a franchise rather than attempting to start your own business can be great. Purchasing a franchise means buying a proven business system. As a franchisee, you benefit from the franchisor's knowledge of how to operate its business, saving time that would otherwise be spent on development. This cuts down on mistakes that are typical of young businesses. You also receive sufficient training to operate the business plus ongoing support and assistance to help solve problems. In some cases, franchisors create a national advertising program which benefits all franchisees.
Franchises generally fall into two categories. They either operate in the retail sector or in any of the service industries. For retail franchises, franchisors may offer anything from full retail store franchises to kiosk franchises. Service franchises offer a full array of services. The types of franchises that may be offered are as unique as the particular business model developed by the franchisor.
The Federal Trade Commission (FTC) governs franchising. The FTC Rule requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD). Before a franchisor is legally permitted to sell a franchise, the franchisor must comply with certain rules by the FTC and/or statutes enacted by the state the franchisor is selling from or the state the franchisor is selling into. The purpose of these rules and/or statutes is to require the franchisor to information for the franchisee to use to make an informed decision about whether or not to purchase the franchise. Previously, franchisors prepared a disclosure document known as the Uniform Franchise Offering Circular (UFOC), which contained all of the material information necessary for the franchisee to make an informed decision. The franchisor was then required to provide the UFOC to each potential franchisee. In 2007, the FTC revised its rule on franchising. Franchisors are permitted to use the UFOC format until June 30, 2008. As of July 1, 2008, all franchisors must use the FDD format. When deciding on whether or not to purchase a franchise, it is best to have an attorney review the franchisor's disclosure document.
The Franchise Rule states what must be disclosed and provides its own disclosure format. It is published in the Code of Federal Regulations, Volume 16, Part 436 (16 CFR § 436), which may be found by link to the following page: www.ftc.gov/ftc/legal.htm.
The FDD is similar to a stock prospectus in that the purpose is to provide sufficient accurate information so that you can make an informed investment decision. Among the items of information contained in the FDD are the history of the franchisor and its founders, information about the types of products offered under the franchise and the general condition of the marketplace for those types of goods, a description of the initial franchise fees and all other fees you will pay during the course of the franchise relationship, a description of the kinds of assistance the franchisor will supply to you, an explanation of the system standards for advertising development and placement, site selection and build out and computer systems. The FDD also details the size and scope of the territory granted to the franchisee and will discuss the rights retained by the franchisor. Franchisors may choose to disclose information relating to the financial performance of the franchise system or franchisees operating within the system.
You can also find the current state and federal guidelines in the Business Franchise Guide, published by Commerce Clearing House, Inc., in many law libraries.
Barry Kurtz recommends that you conduct due diligence (research all available information on the franchise system) before purchasing any franchise. You should obtain a copy of the franchisor’s disclosure document. The FDD describes key provisions of the franchise agreement and also provides crucial information about the franchisor. Review it with an eye to these points:
- Compare franchising opportunities within the industry you are interested in to determine which franchise is best suited for you and which franchise may be the most successful. Once you have chosen to purchase a particular franchise, speak with as many franchisees in that system as possible, including franchisees recommended to you by the franchisor as well as those that were not.
- Is the FDD current? A FDD expires after a year. You should insist upon seeing the currently registered version. If it is close to a year old, make certain that a newer version has not already been written or submitted to the governing agency for approval.
- Study the audited financial statements, particularly the most recent one. By studying the financial statements, you should be able to determine how successful the franchisor is and how successful its existing franchisees are. Question any aspect of the statements that aren’t clear to you. Ask your accountant to review them and provide feedback to you.
- Visit the franchisor’s headquarters. Do they appear to have the resources that are needed? Do their personnel appear to be competent?
- Prepare a business plan. Be as realistic as possible with your projections. Get actual numbers whenever possible. Ask your accountant to review the plan and provide feedback.
- Check references. Phone or visit both current and prior franchise owners. Ask probing questions.
If you are comfortable with all of your fact-finding, consult a reputable franchise lawyer to assist you in negotiating your franchise purchase.
There is no law, rule or prohibition preventing franchisors and franchisees from negotiating the terms of a franchise agreement. Franchisors will often say the franchise agreement is non-negotiable. The truth is that some franchisors are willing to negotiate terms and certain terms are more negotiable than others. For example, while franchisors may not be flexible in negotiating their royalty rates, they may be amenable to negotiating the required schedule for opening the franchised business, extending a franchisee’s time to do so. Factors may include how long the franchisor has been in operation, the size and scope of the franchise system, how eager the franchisor is to sell a franchise and the extent of the franchisee’s business experience or financial backing. Regardless of your level of business experience, when purchasing a franchise, it helps to have an attorney experienced in franchise sales representing your interests.
Thirteen (13) states (California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin) keep franchise offering circulars on file, and 23 states require business opportunity disclosure filings. The Franchise Rule requires franchise and business opportunity sellers to provide to prospective purchasers a disclosure document. The FTC does not require filings of these documents, so we are unable to provide copies to consumers. A total of 13 states keep these on file, and 26 states require business opportunity disclosure filings. Most states provide copies of these disclosures, usually by allowing visitors to their offices by appointment to review or copy the documents.
A few private companies may make franchise disclosure documents filed in one or more states available for a fee. The FTC doesn’t support or endorse these companies:
FRANDATA CorporationFranchiseHelp, Inc.
1665 North Fort Meyer Dr., Suite 410
Arlington, VA 22209
101 Executive Boulevard, 2d Floor Elmsford, r> NY 10523
Also, consumers searching for franchise documents may wish to check an online database maintained by the California Department of Corporations, known as Cal-EASI: www.corp.ca.gov/caleasi/caleasi.htm
No federal or state agency or private organization can tell you whether a company is legitimate or operates in good faith. The FTC or the Better Business Bureau can report on whether consumers have complained about a company. But, operators of fly-by-night franchise and business opportunity scams know this, and may change the name and location of their company every few months to avoid a record of consumer complaints.
There is no substitute for checking the track record of a franchisor or business opportunity seller by personally talking to at least 10 prior purchasers. That’s why the Franchise Rule requires companies to give consumers a list of the names, addresses and telephone numbers of at least 10 prior purchasers who are geographically closest to you. Interview these prior purchasers about their experiences. Ask questions to verify that they have purchased the franchise or business opportunity and that they are not being paid to provide a favorable review. A scheming promoter of a bogus business opportunity may line up "singers" who provide phony testimonials. Visit their business locations in person.
If you want information about consumer complaints from the FTC, request it in writing. Address your request to:
Freedom of Information Act Request
Federal Trade Commission
Washington, D.C. 20580.
Please identify your letter as a "FOIA Request" and include (1) your name, address and daytime phone number, and (2) the name and address of the company you are asking about.
In most cases, the FTC does not charge the public for searching, reviewing documents, or copying. Still, it is a good idea to state the maximum you are willing to pay, so we can contact you in the unusual event that any applicable fees for these services will be higher than your limit.
You can also request information from the Better Business Bureau and look up information about the franchise or business opportunity seller online at: www.bbb.org.
Barry Kurtz counsels franchisee clients in all legal matters related to domestic and international franchising including transactional matters, dispute resolution, as well as business formation. The firm unique and extensive experience representing both franchisors and franchisees forms a strong basis for advising its franchisee clients on minimizing the risks associated with franchising.
For franchisee business formations, Barry Kurtz will create/structure the franchisee entity and prepare all relevant agreements. The firm also reviews all disclosure documents and franchise agreements, negotiates with franchisors to obtain the most favorable terms, and advises its clients in the negotiation of existing franchise agreement renewals. With extensive experience in the area of real estate law, the firm represents franchisees in all real estate matters as well, reviewing and negotiating purchase agreements and leases.