Buying A Franchise

Buying a Franchise Must: Check With The FTC

All franchisors will speak eloquently about the high success rates of their franchisees, but it’s just not realistic to expect that all franchise owners are wildly successful, nor does it make sense to take the word of a franchisor looking to sell you a franchise.

The Federal Trade Commission (FTC) requires all franchisors to issue a Uniform Franchise Offering Circular 10 days before you cut a check or sign an intent to purchase the business. The 1979 Franchise Rule provides a cooling off period where a potential buyer can opt out of a verbal agreement to buy.

The Uniform Franchise Offering Circular provides invaluable information about franchisees close to your intended location, whose contracts were terminated or bought back by the parent company. Talking to these businesses people can provide you with a clearer picture of actual downsides of the franchise not spoken of, or minimilized by the franchisor. The Uniform Franchise Offering Circular also provides information about pending or settled litigation, and great detail about the nature of disagreements that developed between the franchisee and franchisor. Most franchise agreements have a Arbitration Clause written into the contract for just these instances. As with any Franchise Business Opportunity, problems can develop for several reasons.

The Uniform Franchise Offering Circular also provides information of the costs of purchasing a franchise along with inventory, supplies and equipment leases.

State Regulators

Fourteen states have disclosure requirements concerning the sale and registration of franchises similar to the FTC’s Uniform Franchise Offering Circular. There are no protections offered from these disclosures, and the only guarantee is that the franchisor has filed each state’s reviewing agency documentation, and is authorized to sell franchises within the state.

• California

Department of Corporations

(213)576-7500

• Hawaii

Department of Commerce and Consumer Affairs, Securities Compliance

(808)586-2722

• Illinois

Attorney General's Office, Franchise Division

(217)782-1090

• Indiana

Securities Commissioner, Securities Division

(317)232-6681

• Maryland

Attorney General's Office, Securities Division

(410)576-6360

• Michigan

Attorney General's Office, Consumer Protection Division Antitrust and Franchise Unit

(517)373-7117

• Minnesota

Minnesota Department of Commerce

(612) 296-4026

• New York

Department of Law

(212)416-8200

• North Dakota

Office of the Securities Commissioner

(701)328-2910

• Rhode Island

Division of Securities

(401)222-3048

• South Dakota

Division of Securities

(605)773-4823

• Virginia

State Corporation Commission, Division Of Securities And Retail Franchising

(804)371-9051

• Washington

Department of Financial Institutions, Securities Division

(360)902-8760

• Wisconsin

Wisconsin Securities Commission

(608)261-9555

Talk to Other Franchisees

Talk to as many other franchisees before buying a francise. Ignore those whom the franchisor glowingly refers you to and seek those he hasn’t. Those franchisees operating successful franchises should be willing to talk provided your intended location is far enough away from their market territory. Talk to those who have been in the business at least two years, long enough to know the straight story on operations and their relationship with the franchisor, rather than newbies just starting out eager to give glowing reports.

Buying a Franchise Details

Once you’ve done all your background checks, make sure you investigate the franchisor’s credit history. You may enlist the aid of your banker to obtain the report. You’ll be looking for the same qualities that the franchisor will be looking for in you: how the franchisor maintains business relationships by paying bills on time and how financially stable the franchisor is.

Check the terms of your contract closely and enlist the aid of accountants, CPAs and lawyers specializing in franchise law to explain the details. Look for arbitration clauses, rights to sell the franchisee in the future should things don’t work out, or if you have taken a good profit and feel it’s time to move on. Note the reasons and conditions the parent company can use to terminate the franchise. Buying a franchise comes with certain risks, but you can reduce these risks by doing your homework proir to signing any legal documents.