What Must Be Disclosed To You If You Purchase A Franchise?

If you are thinking of buying a business, you may be considering a franchise. Many franchises have well known names, and established business models, making them ideal—you don’t need a lot of experience, many train you in the business, and many items, like promotional materials and marketing, are provided for you.

When and if you do decide to buy a franchise, the franchisor must, by law, provide to you certain disclosures about the franchise, so that you know what you are paying for, and what you are getting. Be wary of any franchise that doesn’t include these in their disclosures (note that there are more disclosures required than are listed here; these are just the bigger, more important ones)

1. Lawsuits and Bankruptcy – The franchisor must disclose any lawsuits it is involved in, and whether it has filed for bankruptcy in the past.  That includes the individual management officers of the company.
2. Fees – The franchisor must tell you what the initial start-up fees that it requires will be. That includes all up-front fees, such as inventory or equipment that you must have to start the business. The franchisor also must tell you what fees you’ll have to pay, through the life of the agreement, such as royalties or money paid for marketing, trainings, or brand development.
3. Your Investment – The franchisor must give you an estimate of what it will cost you to open and start your franchise. These are your expenses—not fees or payments made to the franchisor.
4. Buying Items – The franchisor may require you to buy products from them, exclusively. This disclosure will tell you which suppliers you must purchase from and also disclose whether the franchisor earns anything from your purchases of these required items.
5. Legal Duties – The franchisor must tell you what its legal duties are to you under the franchise agreement and must do so in a table format. For example, if the franchisor will select a site, or won’t place competitors near you, or will assist you in fixing equipment—whatever their obligations are, must be listed.
6. Getting Financing – Some franchises will finance initial fees or other expenses owed by the franchisee. If your franchise offers this, it must disclose the terms of the financing offered.
7. Limitations – Of course, there are certain things that you cannot do, as a part of a franchise. You could not decide you’re selling tacos in your new McDonalds franchise. The disclosure must tell you what all restrictions on you may be, including advertising restrictions.
8. Exclusivity – The disclosure must tell you whether you have a designated territory, or whether the franchisor has the right to place other franchises in locations that may compete with, and draw business from you.
9. Your Work – Some franchises may require that you, personally, work in the franchise, for a set number of hours. Others don’t care. The disclosure must say what the franchise requires of you as far as working in or for the franchise.

Call the West Palm Beach business litigation attorneys at Pike & Lustig today for help with your business law questions.

Sources:

ftc.gov/legal-library/browse/rules/franchise-rule

investopedia.com/terms/f/franchise-disclosure-document.asp