Although scams exist in virtually all industries, in today’s world, franchising is arguably one of the exceptions. If you understand the basics of the franchise model, and if you do your due diligence before paying an initial franchise fee, the truth of the matter is that you should be able to spot and avoid any scams pretty easily. For this reason, franchise scams have largely gone by the wayside, and those that still exist barely resemble legitimate franchise opportunities.
Of course, this does not mean that your success as a franchisee is guaranteed. There is a big difference between a scam and an unprofitable franchise. Franchisees fail, and even entire franchise systems can go off of the rails, but most franchisees who lose their investments will need to sue for reasons other than being sold on a fraudulent scam.
Making Informed Decisions as a Prospective Franchisee
Buying a franchise is a complex investment, and it needs to be treated accordingly. This starts with understanding franchisors’ disclosure obligations. Under the Federal Trade Commission (FTC) Franchise Rule, all franchisors are required to you with a Franchise Disclosure Document (FDD), “14 calendar-days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” If you are being asked to sign an agreement or pay money and you have not been provided with an FDD, then you are not being offered a legitimate franchise.
But, once again, in today’s world this rarely happens. Instead, it is far more common for franchisees to run into trouble as a result of investing without doing their due diligence.
When buying a franchise, the FDD is your starting point for gathering information. Conducting thorough due diligence before buying a franchise involves:
- Speaking with current and former franchisees
- Speaking with the franchisor’s representatives
- Visiting the franchisor’s headquarters
- Carefully reviewing (and negotiating) the franchise agreement
- Comparing the FDD and franchise agreement to those offered by the franchisor’s competitors
- Reviewing the franchisor’s financial statements
- Researching the franchise opportunity online
Learn more: 10 Key Considerations for Due Diligence in Purchasing a Franchise.
But, What if I have Read about a Franchise Scam Online?
Speaking of doing research online, what if your research turns up complaints about the franchise being a scam?
If you see these types of references online, it is important not to rush to judgment (unless the source of the allegation is the FTC or the U.S. Department of Justice). Oftentimes, dissatisfied franchisees will go over the top in complaining about their franchisors. While they may feel that they have been “scammed,” they are most likely not using this term in its legal sense. These types of complaints are certainly worthy of consideration; but, before you make a decision, you will want to dig further to find out exactly why the franchisee feels misled and whether or not the complaint reflects an isolated incident.
Get Help Evaluating Your Franchise Opportunity
Jeffrey M. Goldstein is a franchise lawyer with more than 30 years of experience representing current and prospective franchisees. If you are thinking about buying a franchise, Mr. Goldstein can help you conduct your due diligence and negotiate important protections into your franchise agreement. To learn more about our flat-fee service offerings in a free initial consultation, please call (202) 293-3947 or inquire online today.
