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Practicing due diligence before buying a franchise

On Behalf of | Jan 6, 2022 | Franchise Law

Before buying or selling a franchise, prospective franchisees and franchisors should take steps to ensure they understand each other’s expectations and responsibilities.

The Federal Trade Commission requires franchisors to provide prospective purchasers of franchises material information to weigh the risks and benefits before making a significant investment.

Information franchisors must disclose

The franchisor has an obligation to provide a disclosure document containing 23 items. The information must cover the franchise being offered, the franchisor’s a parent organization and affiliates, if applicable, and other franchisees. Potential franchise owners have a right to learn about the organization’s litigation history, whether they will be required to do business with and purchase goods and services from the franchisor or its affiliates, the franchisor’s right to inspect and audit its franchisees’ businesses, and the marketing and advertising program for the system, among other very important items.

Companies must provide complete details about a franchisee’s initial investment and fees. Prospective franchisees must also receive information about products, services, trademarks and operational systems. The franchisor must disclose it if requires franchisees to personally operate the franchise business. Franchisees also have a right to know how they may sell their businesses and resolve disputes.

Branding strategies, trademark use and financial details

Certain requirements that franchisors can place on franchisees are very expensive and it is important that franchisees understand these requirements before investing in a franchise business.  As noted on Entrepreneur.com, potential franchise owners need to know how often a franchisor requires remodeling.

It is also important for prospective franchisees to understand what operational support to expect from the franchisor. This can come from reviewing the franchisor’s disclosure document and from speaking with current and former franchisees. Finally, an experienced franchise attorney can help a prospective franchisee analyze the dispute resolution provisions and limitations on remedies available to franchisees.

Companies offering franchises must disclose material information about their operations. Performing due diligence and consulting experienced legal counsel can help a business owner decide whether to invest in a franchise or choose one over another.