Franchising and the Law

Part of the flurry of new regulations and legislation that were implemented to help protect franchisees included an FTC rule, applicable before 1-Jan-1995, that required a written disclosure statement, referred to as an FTC offering circular. The FTC offering circular specified areas of information to be presented to prospective franchisees at certain points in time. This FTC rule regarding offering circulars applied to those states that had not passed franchise acts. Fifteen states passed their own franchise acts that require registration, while the FTC, which governs all the states, doesnot require registration.

Under the franchise laws currently effective, the FTC and all 50 states use the same uniform Franchise Offering Circular, although the registration states retain the right to impose stricter provisions if they so desire, including registration. In all instances, the federal and state statutes do not provide a means of deciding whether or not a franchise is of any value or even whether or not the information submitted by the franchisor is true or not. The statutes merely force the franchisor to make certain representations and reveal certain information that, if untrue, would subject the franchisor to civil and criminal lawsuits.

The bottom line is that no legislation will ever eliminate crime and no legislation will ever eliminate the naivete of some potential business owners who are obsessed with seeing only the good parts of a transaction and none of the bad. As a prospective franchisee, you must be aware of the con artists that are hard at work trying to present the best possible image of their particular opportunity and who call their business endeavors "partnerships" or "licenses."

This does not mean, however, that all partnerships or license agreements are franchises or fraudulent schemes. Because licensing and franchising have become almost synonymous, the con artists seem to consider arrangements called "partnerships" as convenient labels for circumventing the disclosure requirements of federal and state law. These type of partnerships usually offer the use of the same business name and style, but the seller is a partner whose interest is eventually purchased by the business-seeking entrepreneur. The major drawback to this type of arrangement is that the selling partner does not have the capital and does not with to reveal information about himself or herself. This would not be the case if the seller were a franchisor. In addition, before the new business-seeking entrepreneur purchases the partnership, the business is usually subject to the control of the selling "partner."

In conclusion, beware of any offered entity that supposedly gives you a going business under a trade name and has you start out as a partner and end up eventually as a sole owner, along with other individuals who also purchased a partnership interest in other areas and became owners, using the same name as yours.