Commercial

Buying In

Think you're the right kind of person for a franchise? Sorting out the risks and rewards requires diligence.

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What is a Franchise?

A franchise is a privilege granted to another that allows a sole right within a territory or market to engage in a certain business or deal in a certain trademarked product.*

There are several types of franchise — product or service franchises, or business format franchises. The fundamental element they have in common is their emphasis on the continuing relationship between the buyer and the seller of the franchise.

*According to www.legal-term.com

Franchise Regulation

The U.S. Federal Trade Commission requires that all franchisors make extensive disclosures about their franchises. The most common means of doing this is the Uniform Franchise Offering Circular (UFOC). You must be given one of these for any franchise you’re considering. Review it thoroughly, and have a lawyer do the same.

The UFOC must contain detailed information about 21 items. These include:

  • Background information on the franchisor and offering.
  • Business experience of the franchisor’s officers and executives.
  • Initial franchise investment and ongoing fees.
  • Franchisor’s litigation and bankruptcy history.
  • Required purchases and related material about sources of supply.
  • Obligations of both franchisee and franchisor under the contract.
  • Territorial limitations.
  • The use of patents and copyrights.
  • Any requirements for the operation of the business.
  • Restrictions on what may be sold.
  • Earnings claims.
  • Franchise statistics, such as the number, location, and types of existing franchises; names and dates of terminated franchises and reasons for termination.
  • Detailed financial statements of the franchisor conforming to generally accepted accounting principles.
  • Conditions for termination.

    • In addition, 15 states have franchise investment laws that require franchisors to provide pre-sale disclosures. Some of these states also require a franchisor to register before selling franchises in that state. These states include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. For more information visit: www.ftc.gov/bcp/menu-fran.htm.

    About the Author

    Jay Holtzman

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