Franchise 101: A Primer

Before you dive head first into buying a franchise, educate yourself. One major subject that you will want to learn the basics about is franchise law. Read on and remember that you will eventually want to find a lawyer specializing in franchise law to help you with particular questions and problems that may arise. (Also keep in mind that the following information relates to laws in the United States only.)

Why Know the Basics?

Before you ever got behind the wheel of a car, what were you given to read and learn? It's likely you received a Driver's Manual with rules and laws of the road in your state. Can you imagine driving and not knowing any of the rules? That's a scary thought!

Why would you put yourself in the driver's position when buying a franchise, which is a life-changing decision, without knowing the rules of the business?

UFOC

The first thing a potential franchisee needs to know about is the UFOC (Uniform Franchise Circular Offering). The UFOC, by law, is a document that a franchisor or franchise broker must present to the person considering buying a franchise, which contains extensive information about the franchise being consideration. Additionally, you must be provided with completed contracts covering all material points at least five days prior to the actual execution of the documents. This time gives you the opportunity to review contracts with a lawyer and provides a cooling off period to ensure your final decision is not only emotional, but rational as well. For more in-depth information on the UFOC, visit the Franchise Law Team's web site, where you will find a UFOC Guide with all the information you will need to learn about the format of the UFOC. http://www.franchiselawteam.com/

FTC's Franchise Rule

This rule was put into effect on October 21, 1979 by the Federal Trade Commission and requires that covered franchisors supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. The disclosure must take place at the first face-to-face meeting where the subject of buying a franchise is discussed.

Individual States

Some states require a franchisor to register a UFOC and maintain a registration with the state agency listed below. If the franchise you are interested in buying is authorized, they will be registered with the agency corresponding to that particular state. Please see the following list:

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

Some Frequently Asked Questions about Franchise Law and Your Rights

Do you have law-related questions, but you don't want to go to a lawyer just to ask them? In this section, you will find the answers to some common franchise law questions.

Can the franchise agreement be terminated or not renewed? It all depends on the terms of the specific agreement and the extent to which the franchisor and franchisee have complied with the agreement. For example, if you start selling random or unapproved items at a copy store franchise, the franchisor may terminate your agreement, legally. Similarly, if your franchisor is not delivering all components of the franchise program as promised, you may have the right to terminate the contract.

Additionally, the franchisor has the right, in most cases, not to renew your contract if they are not happy with the way you've run the franchise during the contracted period of time.

What happens when a franchise is bought-out, merges with another company, or goes bankrupt? Read the franchise agreement very carefully! It is possible that the contract you sign has no specific provisions addressing merger or acquisition activity at the franchisor level. If this is the case, you will need to find a lawyer who specializes in franchise law. It is important to protect yourself against worst-case scenarios such as losing your business or your exclusive rights to a specific territory, etc.

Can a franchisee take a franchisor to court in their (the franchisee's) home state? Another situation in which you will need to read your franchise agreement first. Often, the agreement will mention where disputes will be played out and where lawsuits will be tried. In some states, arbitration is not an option and disputes must be settled in court. Research such laws in your particular state.

If the information given to a franchisee by a franchisor in an agreement is incomplete or inaccurate, what can a franchisee do? The law prohibits the sale of a franchise that is sold through an untrue or incomplete agreement. In such a scenario, if a material fact (a fact that might have helped you to decide for or against buying the franchise) is incorrect or missing, you may bring legal action to recover any damages. Consult with a lawyer if such a situation arises.

Can the franchise agreement and provisions be negotiated? It all depends, and this is a situation where you want a good franchise lawyer to sit down with you and go over every detail of the agreement you are planning to sign. In some states, a franchisee must sign a copy of the exact agreement on file with the state. In other states, this is not the case at all. Some franchisors will not negotiate anything. Other franchises might negotiate everything from price to retail space décor. Find a good lawyer and talk to your franchisor before you decide to buy the franchise.

Is a potential franchisee entitled to a disclosure statement when considering the purchase of a franchise? Yes, by law, you will receive at least two major documents no less than 10 days before you plan to sign any agreements, but preferably you will receive these documents at the first meeting you have with the franchisor. The Federal Trade Commission (FTC) has mandated this practice. You will receive a written disclosure statement that sets forth certain information about the franchised business and you will receive a proposed franchise agreement. You might also receive an earnings-claim statement, but this last document does not have to be furnished by law.

What's supposed to be in a disclosure statement and what is supposed to be in a franchise statement? Briefly, a disclosure statement (also called a UFOC, or circular offering) should contain data and information from the franchisor in over 20 categories. Risk factors must be stated in bold type. Additionally, there needs to be all of the following: audited financial statements, statistics and listings of all other franchisees, renewal, termination, transfer, and dispute resolution, any requirements of the franchisee to actually work in the franchised business, any prior litigation actions and any history of bankruptcy, the identity and key personnel affiliated with the franchisor, background information on the franchisor, all fees including the initial franchise fee, and all additional and ongoing fees, franchisee's main obligations, obligations of the franchisor, exclusive territory area, patents and copyrights, trademarks, service marks, trade names, logos, commercial symbols, and any commitment the franchisee will have to buy or lease items from designated sources.

A franchise agreement is what binds the franchisee and franchisor and is at the heart of the relationship they will have with each other. There is no standard form for such an agreement and the information included will also differ depending on the type of franchise involved and how well established the franchise is. You have the legal right to obtain this agreement at least five days before you are planning to sign the actual agreement. Basically, the agreement will contain provisions covering the obligations of the franchisor and the franchisee, the operation of the business, training and support the franchisee will receive from the franchisor, the territory the franchisee will have rights to, the duration of the franchise and any renewal rights, and how much the franchisee must invest.

The best source of information is a lawyer who specializes in franchises!

For more information, or for more specific questions, find yourself a reputable lawyer who specializes in working with franchisees and franchisors. Every franchisee and franchisor should have a lawyer to consult with, particularly when signing new agreements.