Mistake Number 2 Prospective Franchisees Make in Purchasing a Franchise
Failure to read, understand and ask questions about the disclosure agreement.
The same scenario as Mistake Number 1, the only difference is that a disclosure document does not require your signature. The law is very clear on the issuance of this document to prospective owners. Before you buy a franchise a disclosure document must be given to you at least ten days prior to signing a franchise agreement. The contents include a history of the franchisor, its management, any lawsuits or bankruptcies, a three-year financial history and a lot of other relevant information.
Once again, the law requires a franchisor to give you a copy of its disclosure document. If the salesperson tells you that an offering is exempt from the FTC requirement, ask to see a document that upholds that opinion. Call the state agency or local FTC office for verification of the exemption. Don't, under any circumstances, continue to deal with the company any further until you are satisfied that it is not a franchise.
What constitutes a Franchise? According to the FTC rule there are three common elements: (1) the distribution of goods and services associated with the franchisors trademark (e.g., Arby's, Burger King, Midas Mufflers), (2) significant control or significant assistance to the franchisee's method of operation (e.g. direct operational help) and (3) required payments by the franchise to the franchisor (e.g., franchise fee). Any time these elements are present you have a franchise and it falls under the disclosure rule.
2 comments:
Nice post. I'll have to keep this in mind, because I plan on running my own business soon. I've normally thought about starting a business from scratch, but lately I've been thinking about buying one instead. I'm not sure what kind I would want to do. Does anyone have any suggestions? Advice? Thanks.
@Rebecca -- If you plan on buying a business, make sure to do your due diligence! It is especially so in times like these. That being said, there are sites where you can gauge what's available in your area. There's one called BizTrader.com, which is this online global marketplace where you can buy or sell a business. You can also use it to find a lender, broker, or buy a franchise. I also suggest looking into your local small business groups. They should have a good idea on what's going on in your neighborhood.
Good luck!
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