Is Franchising for You? – 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:

1. Give you a copy of the Uniform Franchise Offering Circular
(UFCO) at least 10 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.

2. 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.

3. 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

4. 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).

5. Provide information on franchisee’s initial fees and other
costs (e.g., royalties, promotional fees).

Franchisors should:

6. Provide a marketing plan, promotional materials and area
site selection assistance to franchisees.

7. 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)

8. Provide a trademark or service mark that is known, or will
be known through advertising in the geographic area of use.

9. 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.

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SMB Reviews
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SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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