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Franchise Risks – The Wrong Way to Franchise Success




Michael Seid at AllBusiness.com writes about the sad reality that federal and state regulatory agencies could not and do not tell prospective franchisees which are the good franchise investments and which are the bad ones.  He says most states do not require franchisors to submit to their respective regulatory agencies disclosure documents.  He wrote “The Federal Trade Commission never gets to see your disclosure documents before you use them and most states have no requirement for you to send them disclosure documents.”  Only a few states have this requirement and issue permits to offer franchises.  But he also says that it is seldom that these agencies review these papers though.

Legally, companies only need to prepare some documents or forms that they will give to potential franchisees.  Would you believe that a franchisor is not even legally obligated to disclose sales figures or cash projections to the prospective franchise applicants?  Experience or training in business or even in the industry one is involved in are not requirements of a franchisor.    You just only need a dream or idea and somebody wanting to invest as your franchisee.

It is surprising though, that despite these legal non-guarantees, franchising in the U.S. is a flourishing and considerably safe investment opportunity that is a big help to the economy.  Why is this so?  Many franchisors have profitable and well managed businesses with fine-tuned operating systems in place before offering their businesses as franchises.

But as it is, even failing or unstable businesses are offered as franchises.  Potential franchisees, beware!  Do your research; the Internet is a fountain of source.  Carefully evaluate these franchises.  Ask experts.  Read franchise publications.  Remember, not “all franchise opportunities are the same and equally good investments”, warned Seid.

People new to franchising are generally surprised to find that in the U.S., you are not required to have ever operated the business you want to franchise. You just need an idea and someone willing to invest in becoming your franchisee.

But don’t you have to tell prospective franchisees how much money they will make? No. There is no legal obligation to share your sales with prospective franchisees, or whether any of your units made any money at all.

Beware of Sketchy Franchise Practices
To offer a franchise in the U.S., all you legally need to do is prepare some government-mandated paperwork and give it to your prospective franchisees before they sign the franchise agreement.

Don’t Rely on Franchise Regulators
The Federal Trade Commission never gets to see your disclosure documents before you use them and most states have no requirement for you to send them disclosure documents. In the U.S. regulatory scheme, only a handful of states require you to submit disclosure documents and receive their permission before you can offer franchises in their states, and some of those states don’t even review them. These filing states are really only looking to collect a filing fee.

As we will discuss in future articles, the rules regarding franchising generally only deal with the required types of disclosures and the process you must follow in making your franchise offering to a prospective franchisor. This may sound like a terrible situation that puts potential franchisees at risk, but in reality, since franchise disclosure laws were enacted, franchising in the United States has been transformed into a legitimate and, arguably, extremely safe form of investment.

But the rules governing franchising do not guarantee that the underlying business is sound, or that the franchisor has the experience, skills, or resources to be effective. All the rules do is ensure that a prospective franchisee have information upon which to investigate a franchise opportunity and to make an informed decision on whether or not to invest in a particular franchise system. …

Photo by BC Gov Photos

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