Franchising Insight Crucial Questions to Ask When Buying a Franchise

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Before you sign on the dotted line, there are important things you should know about how franchises are regulated. Taking the time now to figure it out could save you time and money later.

Here are some answers to questions prospective franchisees might be asking:

Do I need a lawyer?

No, but it might be worth the money. Lawyers can help you determine what your rights and obligations are. Lawyers can also help you avoid the hassle of figuring out what federal or state laws apply. They're also more familiar with documents pertaining to franchises than you are and may be able to help you avoid trouble down the line.

"A lot of people do not go to a lawyer and live to regret it," says Dale Cantone, deputy securities commissioner in Maryland, adding that many of the complaints he sees are from franchisees who did not use a lawyer.

As a prospective franchisee, what kind of legal documentation am I entitled to?

The Federal Trade Commission requires sellers of franchises to give prospective buyers a disclosure document, called an offering circular, containing specific information about the business. But a different document, crafted by states, is more widely used and is also allowed by the FTC. That document, called a Uniform Franchise Offering Circular, or UFOC, demands a more thorough disclosure by the franchiser. The UFOC contains important information about the franchise, along with dispute-resolution procedures, transfer rights, and names, addresses and telephone numbers of current and former franchisees. For practical purposes, since many of the chains are national, most franchisers use the UFOC.

The other main legal document franchisees receive is the franchise agreement, which is more specific about the terms of the relationship between the franchiser and franchisee.

Will the FTC review the disclosure document to make sure I'm protected?

No. However, some states review the disclosure document for completeness and accuracy before the sale of a franchise can take place.

What in particular should I look for in the disclosure document or UFOC?

The devil really is in the details, so read them carefully. Be sure to contact other franchisees in the chain. Ask them about their business, profits and relationship with the franchiser. Check the disclosure document for details, such as how much litigation the company is involved in, compared with how big it is, says Mr. Cantone, the Maryland official.

Mr. Cantone also suggests paying close attention to the number of franchises that have been terminated, not renewed or otherwise left the system, and how many have been reacquired by the franchiser. All of this is set out in the disclosure document, along with the names and addresses of franchisees who have left.

"I've seen franchise agreements that I can't imagine anybody signing," Mr. Cantone says, referring to agreements that are so one-sided that a "franchisee is entering into the deal and the deck is stacked against him."

Other things to be aware of include the process for resolving disputes. Most agreements require franchisees to travel to the franchiser's principal place of business to settle a dispute, which can be onerous, particularly for small franchisees. Also look to see whether a franchiser gives information about what you could potentially earn or what other franchisees in the chain earn. Some companies may claim that prospective franchisees will earn a certain income or that existing franchisees earn a certain amount. If franchisers make such claims, they have to provide the written basis for them, and franchisees should think twice about any company that doesn't set out in writing how it computed those figures.

Make sure you understand the conditions and terms of termination and renewal. Typically, renewal is not automatic, so you'll probably have to renegotiate. These aren't necessarily reasons to pass up a deal, but they certainly should be considered when weighing the risks and rewards. Also know such things as your right to sell, your right to remain in the ndustry after the agreement ends, and what kind of exclusivity you have over a particular geographic area, says Philip Zeidman, a partner in the Washington office of the law firm Piper Rudnick LLP. Mr. Zeidman is also counsel to the International Franchise Association, an industry trade group based in Washington.

Are disclosure documents available for review by the public?

Just as some first-time house buyers want to look at sample contracts, potential franchisees sometimes like to see what typical franchise agreements and related documents look like. In some states, the disclosure documents are public and available for review, but typically only in person, says Carl Zwisler, a partner in the Washington office of the law firm Jenkens & Gilchrist. For a fee, however, prospective franchise operators can obtain copies of UFOCs, as well as information about specific industries, from such franchise-data providers as Frandata in Washington. Frandata, a unit of National Cooperative Bank, which serves cooperatives, nonprofits and other member-owned organizations, sells its copies online.

Why doesn't the FTC just adopt the UFOC?

The agency is working on adopting the UFOC with enhancements, says Steven Toporoff, franchise program coordinator at the FTC. Such a rule change can take years, Mr. Toporoff adds, but once it happens, a new and improved UFOC will be the prevailing law.

In the meantime, the FTC accepts the UFOC in lieu of its own disclosure document, and franchisers overwhelmingly choose to use it.

Is there a central law that governs the relationship between franchisers and franchisees?

No, that also varies by state. Over the years, there has been some effort to create a uniform law, but disagreement on this topic still exists.

How do I find out what my state's rules are?

The Internet is a very good place to start. The FTC's Web site, www.ftc.gov, has some useful information concerning regulation by the states, as well as contact information for state regulators. The Chicago-based American Franchisee Association also has contact information available on its Web site at www.franchisee.org.

How do I find out whether a particular franchiser has a complaint against it?

Such information may be on file with state officials. In most states, the attorney general's office would be a good place to start, though some states handle franchise matters through their division of securities, departments of commerce or corporations, consumer-protection or insurance offices.

You may also file a Freedom of Information Act request with the FTC, making sure to be as specific as possible about the information you want. More times than not, the FTC hasn't received any information about the particular franchiser, but that doesn't mean people shouldn't ask, says Mr. Toporoff of the FTC. "Certainly it's something that's worth doing if you're a prospective franchisee," he says.

I think I'm being treated unfairly by my franchiser. What should I do?

Try to work it out. Review your disclosure document and franchise agreement. Determine what your rights are and how exactly you may have been wronged. Talk to your franchiser about the issue. Some problems can be ironed out before they escalate into major battles.

What should I do if I've reached an impasse?

Once it gets to this point, hiring an attorney is wise. The course of action really depends on what the issue is. There are many variables the attorney can help you work through, including what federal or state laws apply, whether there are antitrust issues, common-law issues or other legal remedies. According to J. Michael Dady, a franchisee attorney with Dady & Garner in Minneapolis, franchisees commonly complain that the franchise opportunity was misrepresented or not fully disclosed. Disputes also often occur when the franchiser's promised assistance doesn't materialize, when the franchiser is locating other franchise or company-owned stores too close, or when the franchisee is impeded in trying to transfer the business for fair value, according to Mr. Dady.

If you think there's fraud involved, you may also want to contact your state regulator and the FTC.

Where do I find a lawyer who specializes in franchise law?

Talk to other franchisees. Your state bar association may also offer some suggestions. In addition, the American Association of Franchisees and Dealers has information on its Web site at aafd.org, as does the American Franchisee Association.

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