Disclosures You Are Entitled to When Buying a Franchise
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UPDATED: Jul 16, 2021
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If you are looking to buy a franchise from a franchiser, the franchiser must give you two crucial documents mandated by the Federal Trade Commission (the “FTC”): (1) a written disclosure statement (or “offering circular”) that sets forth certain information about the business to be franchised, and (2) a proposed franchise agreement or contract. A third attachment, an “earnings-claim” statement of the franchiser, may or may not be furnished, at the election of the franchiser. All of the above documentation, including the earnings-claim statement, is contained in a single form (as opposed to separate documents), commonly referred to as the “Uniform Franchise Offering Circular” (UFOC). (Most franchisers prefer the UFOC document since the document, with some modifications, is acceptable in all states.)
The disclosure is supposed to be written in plain English, clearly, concisely, and in narrative form. Even so, it sometimes requires a lawyer to interpret what is really being said — and what is not being said.
You are entitled to the disclosure material either at the first face-to-face meeting with the franchiser or 10 days in advance of the signing of the actual contract or paying money, whichever happens first.
The fact that the disclosure is government mandated does not mean that the offering has the approval or recommendation of the government, or that the information is complete or accurate, or the franchiser is reputable. The government does not check for truthfulness within the disclosure, how good a franchise is or the risk involved (this is despite a “risk factors” section in the document). Any confirmation, verification, and assessment of the contents are the responsibility of the buyer of the franchise. While misrepresentations, fraud, or omissions in the disclosure statement may result in civil and criminal liability to the franchiser, as a prospective franchise buyer you should be more interested in making sure you get what you bargain for, than having to sue someone down the road.
For a quick read on franchise operations, click here.