Buying A Franchise

FRANCHISING FACTS

While the information contained in this pamphlet is believed to be accurate, it is general in nature. It is not a legal opinion of The Florida Bar but rather a summary of certain legal matters and should not be relied on as legal advice.

This pamphlet is designed to give basic information to those thinking of expanding their business through franchising (a prospective franchisor) and to those thinking of buying a franchise (a prospective franchisee). We hope it steers you in the right direction.

A myriad of products and services in our state are sold by concerns doing business under what is called product or business format franchising. Today, nearly 40 percent of all retail sales are made from franchise outlets. These include not only fast food operations, but also the sale of automobile products, accounting services, independent post offices, advertising services, employment services, home furnishings, lawn and garden supplies, hotels and motels, pet care, hair salons, printing and copy centers, real estate sales, travel, weight control, drycleaning and more. U.S. Department of Commerce statistics estimate that a new franchise outlet opens in the nation about every 17 minutes.

WHAT IS FRANCHISING?

Franchising is a method of doing business, of selling goods or services where one party (a franchisor) allows another (a franchisee) to use its trademark and its business system in exchange for a fee. The term "franchise" can refer to the relationship between the franchisor and the franchisee, or is sometimes used to refer to the business itself which the franchisee buys.

The legal definition of a franchise under federal law is a written contract (regardless of what it's called) where three elements exist:

1. the use of another's trademark, tradename, etc.;
2. the payment of $500 or more during the first six months of operations (excluding wholesale purchases of inventory); and
3. significant assistance and/or significant control of the operations.

If these three elements exist, it's a franchise under federal law.

Franchising comes in various forms. One is the franchise of an entire retail business operation, such as a fast food restaurant or real estate sales office (a "business format" franchise). Another is a product distribution system, where a franchisee distributes the franchisor's products, such as automobiles, gasoline, or soft drinks under the manufacturer's name (a "product" franchise).

The appeal of franchising is that it is supposed to provide a pre-tested formula for success. It provides a mechanism for rapid growth of the franchisor's outlets of distribution and, at the same time, increases the likelihood of success of the small business person, the franchisee. Franchisors should provide a business system, managerial training and assistance on an on-going basis, and the franchisee must comply with the controls and procedures established by the franchisor.

The U.S. Department of Commerce reports that less than 5 percent of franchised business outlets have been discontinued each year since 1985. Other statistics provided by the U.S. Small Business Administration show that 38 percent of all business start-ups are discontinued in the first year. After five years, 90 percent of franchises are still in business, while only 23 percent of independent operations are still in existence after five years.

WHO REGULATES FRANCHISING IN FLORIDA?

Franchisors must comply with Federal Trade Commission regulations regarding disclosure (the "FTC Franchise Rule"). Under the FTC Franchise Rule, every franchisor must prepare an extensive document with information about the company that must be given to a franchisee (an "Offering Circular"). This Offering Circular contains information about the business, including fees, investment required, bankruptcies and litigation history of the company, the term of the franchise or how long it will last, financial statements of the company, and earnings claims (if any are made — and usually they aren't). A current Offering Circular must be given to a prospective franchisee at least 10 business days before any agreement is executed or the franchisee pays any money to the franchisor.

Florida is one of the majority of states that does not specifically regulate franchising. There is no state registration or disclosure law as such. However, certain Florida statutes govern some aspects of the franchise relationship, such as misrepresentations by franchisors, deceptive and unfair trade practices, state registration of trademarks, antitrust violations, and regulation of so-called "business opportunities" which are not usually, but in some instances also can be franchises.

WHERE YOU CAN FIND MORE INFORMATION

The U.S. Department of Commerce and the International Franchise Association or "IFA" 1-800-543-1038 or (202) 628-8000 have publications listing franchise companies and other panphlets to aid you if you are thinking about franchising or considering a franchise purchase. Other sources include American Association of Franchises and Dealers, (619) 235-2556 and American Franchisee Association, (312) 431-0545.

WHAT TO ASK BEFORE BUYING A FRANCHISE

The IFA recommends you investigate the following:

• the type of experience required in the franchised business. Do you have the right background for this business? Find out what you need to know;
• the operational characteristics of the business;
• the hours and personal commitment necessary to run the business;
• who the franchisor is, what its track record has been, and the business experience of the officers and directors;
• how other franchisees in the same system are doing. Contact as many of the current franchisees as you can, as well as ones who have left in the past year, and talk to them;
• how much it's going to cost to get into the franchise;
• how much you're going to pay for the continuing right to operate the business;
• if there are any products or services you must buy from the franchisor and how and by whom they are supplied;
• Does the franchisor own the trademark? Is it federally registered? Will the franchisor indemnify you for trademark infringement?
• the terms and conditions under which the franchise relationship can be terminated, and how many have been terminated during the past few years; and
• the financial condition of the franchisor and its system.

ARE ALL CLAIMS MADE TRUTHFUL?

While penalties may be imposed on franchisors for inaccuracies and misrepresentations contained in the Offering Circular, you must act to protect yourself. One of the best ways to do this is to make sure you talk to the other franchisees who have already purchased franchises from the franchisor. Find out if they are "satisfied customers."

You should also have a lawyer experienced in franchise law and your accountant assist you in reviewing the Offering Circular. By obtaining the Offering Circular of several companies in which you are interested, you'll be better able to "comparison shop."

HOW TO PROTECT YOURSELF

Due largely to its success, franchising, as with other business methods, has attracted its share of unqualified promoters. Many government agencies and local Better Business Bureaus attempt to check on companies or individuals selling franchises, but your best protection rests with you and your professional advisors. You must thoroughly investigate the specific franchisor, its reputation, its business record and its industry. The best way to do this is with the assistance of a qualified franchise lawyer who understands the complex nature of franchising, especially the antitrust laws, the trademark laws, and the FTC Franchise Rule. You should also have a competent accountant examine your purchase before you buy.

WHERE TO GET LEGAL HELP

A good place to begin is with your own lawyer who may be able to give you a review of your legal rights and advise you how to proceed. If your lawyer does not regularly handle franchise matters, ask that he or she refer you to an attorney who does.

Another way to find a lawyer is through one of Florida's lawyer referral services listed under "attorney(s)" or "attorney referral services" in the yellow pages of the telephone book. This service will give you an appointment with a lawyer for a nominal fee.

If there is no lawyer referral service in your city, the statewide Florida Bar service can locate a lawyer for you. You may call this service, toll free, at 1-800-342-8011. The statewide service, which operates only in cities where there is no local program, will refer you to a lawyer in your area for an initial one-half hour consultation for $15.

Other resources include the International Franchise Association, American Bar Association or The Florida Bar Franchise Law Committee.

The material in this pamphlet represents general legal advice. Since the law is continually changing, some provisions in this pamphlet may be out of date. It is always best to consult an attorney about your legal rights and responsibilities regarding your particular case.