As a transactional attorney, especially one with experience representing small retail businesses, I often consider my audience with whom I am interacting, whether it be another attorney, a sophisticated investor, or a business owner. Each of them brings a different experience and perspective into a certain interaction. In general, I find this consideration to be important because it helps me tailor my message in a way that is most beneficial to the audience member. One of the most interesting aspects of franchise law, I find, is that franchise lawmakers and regulators also made this consideration when they created the current framework of franchise laws that recognize and compensate for the differences between the actors in the business of franchising: franchisors vs. new franchisees.
Because the nature of a franchise system allows a franchisor to grow its brand by selling franchise businesses to new people that can rely on an established marketing, business, and operational plan provided by the franchisor, many persons who first buy into a franchise system are relatively inexperienced as franchise business owners in their respective industries. Instead, these new franchisees are often times experienced in providing goods or services of a different business from what they purchased, looking for an additional income-stream, or passionate about finding a new career after leaving a long-standing job. Before the creation of the modern franchise regulation system in the United States, these new and inexperienced franchisees had an extensive history of being taken advantage of by franchisors with nefarious intentions (i.e. misrepresentations regarding the financial opportunity being offered).
Recognizing the need for a regulatory framework to establish minimum disclosure requirements to create transparency between sophisticated franchisors and new franchisees, the Federal Trade Commission (FTC) issued the Franchise Rule in 1978 (amended in 2007). The original Franchise Rule required that franchisors furnish a prospective buyer of a franchise a document called a Uniform Franchise Offering Circular (now termed a Franchise Disclosure Document or “FDD”) that provided enough information to sufficiently educate a potential buyer to decide on a franchise investment opportunity.
Now, thanks to the FTC and various state laws, investing in a franchise has become less risky for a potential buyer, and arguably more accessible to someone who is unfamiliar with the type of business they may purchase. Although the modern regulatory framework does provide a potential franchisee some reassurances of transparency from the franchisor, potential franchisees should never exclusively rely on the disclosures provided to them. The attorneys at Carter & Tani regularly advise our clients to conduct their own investigation into a potential franchise investment opportunity by:
- Contacting previous franchisees who are no longer a part of the franchise system
- Contacting current franchisees
- Thoroughly reviewing the Franchise Disclosure Document and Franchise Agreement
- Investigating the reputation of the franchise system with customers in the industry
- Preparing a business plan based on information received from the FDD and the potential franchisee’s own independent investigation.
Whether you are a franchisor, a franchisee, or a prospective franchisee with a potential franchise opportunity, please feel free to contact our office for any of your questions or concerns related to your Franchise Disclosure Document, Franchise Agreement, or franchise relationship in general.