Identifying the Franchisor's Responsibilities
An important step in making an informed decision about purchasing a franchise is to know the responsibilities the franchisor is legally obligated to fulfill. One of the toughest decisions any entrepreneur faces is whether or not to purchase a franchise. And while buying a franchise means obtaining a complete system of doing business, there is no guarantee for success.
Being aware of the franchisor's responsibilities takes some of the guess work out of the decision making process. Learn as much as you can about the franchise and the franchisor's obligations before entering a purchase agreement, or even before meeting with the franchisor or his or her representative to discuss the possibility of purchasing a franchise.
Fourteen states have franchise disclosure or registration laws that require the franchisor to prepare documents for submission to state authorities. The FTC requires in all states that a lengthy disclosure document, as well as financial statements be given to franchisees before purchasing the franchise. In addition to state filing fees, printing and accounting and legal expenses, the franchisor must develop internal controls and policies to ensure ongoing compliance with regulations.
Franchisors are obligated to:
- Give you a copy of the Uniform Franchise Offering Circular (UFCO) at least ten days before you sign the agreement. If you meet face to face with the franchisor's representative and have serious discussions concerning the purchase of the franchise, the UFCO also must be given to you at this time.
- Give you a copy of the franchise agreement, other contracts and the franchisor's financial statements. The franchisor, however, cannot, under federal law, make claims concerning the amount of money you will make. The UFCO will disclose estimates of all initial start-up costs.
- Provide one week of training to you, the franchisee, and your manager in one of the parent stores, the operational manual and ongoing support and assistance to you and other franchisees.
- Provide guidelines on audits and assignment procedures and any extra franchisor criteria for approving an assignment (e.g., ownership rights - franchisee rights to sell the franchise if it becomes successful).
- Provide information on franchisee's initial fees and other costs (e.g., royalties, promotional fees).
Franchisors should:
- Provide a marketing plan, promotional materials and area site selection assistance to franchisees.
- Provide adequate insurance coverage for franchises. Insurance coverage generally includes:
- fire insurance
- inventory insurance
- burglary insurance
- workmen's compensation
- accident and health insurance
- use and occupancy insurance
- general liability insurance
- automobile insurance (may be optional depending on franchise type)
- Provide a trademark or service mark that is known, or will be known through advertising in the geographic area of use.
- Provide guidelines on the purchase of inventory and equipment, requirements on restrictions on goods sold and the terms of agreement and renewal.
Most of these responsibilities are or should be included in the UFOC document, but since there are no uniform regulations governing the operation of franchises in any given state, make sure the UFOC document complies with the FTC's regulations, and the regulations of the state in which you plan to purchase the franchise. Review the UFOC document carefully with your attorney before signing the purchase agreement.
* Reprinted with permission of the U.S. Small Business Administration
