FTC ADVOCATES CAREFUL RESEARCH OF FRANCHISE
May 15, 2023
The Federal Trade Commission (FTC) has posted another important blog entitled “Franchise Fundamentals: Researching franchise opportunities”. If you are considering investing in a franchise, you should read it carefully. The FTC recommends a three-step process and Bundy & Fichter PLLC agrees that what the FTC recommends is a good starting point.
FTC Recommends Three Steps Before Buying A Franchise
The FTC recommends: (1) start by examining your own financial capabilities in light of the risks; (2) research and understand the marketplace of franchising, including the franchisor’s experience and the competition; and (3) assemble an informal panel of trusted advisors to help you make the decision.
Bundy & Fichter PLLC Says Listen To The FTC
Bundy & Fichter encourage you to read the FTC blog very carefully and to follow what they suggest. The FTC has been regulating franchising and dealing with unsavory franchise sellers since the early 1970s. They know the industry, how it works, and how important it is for you, as a prospective investor, to be careful. The FTC cannot save you from what turns out to be a bad decision, so you must educate yourself and listen carefully to experienced franchisee counsel.
Don’t Fall For The Hard Sell—Run For The Exits
The most important piece of advice in the FTC’s blog is that you must not get in a hurry. Most importantly, recognize the “hard sell” and run away from it without looking back. Franchise salespeople are so good, they could make a 1980s timeshare salesperson blush. They are skilled at playing with our emotions, sensing when you have fallen in love with them or the franchise, and then pressuring you to “act now”. Like a used car salesman, they will suddenly inform you that someone else is looking at that same candy-apple red sportster and it may be gone by morning unless you buy it this afternoon. We have all had that experience. There are always two other people looking at that same territory. When that starts to happen, the FTC says “run for the exits”. Bundy & Fichter PLLC concurs.
Understand The Legal Documents Before You Buy A Franchise
Although it may be subsumed in the FTC’s “Step 3”, Bundy & Fichter PLLC would add at least one thing to the FTC’s advice: Understand the legal documents before you buy a franchise. Soon after your first communication with the franchisor, you will receive a Franchise Disclosure Document (FDD). Do not regard the FDD as “just a formality” or “just something the government requires us to give you”. It is a thick and intimidating document. It is written in dense legalese. Some experts have concluded that it takes at least 20 years of formal education to fully understand the typical FDD. That means most attorneys cannot understand them (most attorneys have 19 years of formal education—unless you include kindergarten). You will need some help fully understanding the FDD. Regard the cost of getting that help as part of your investment.
Do Not Get Intimidated And Blow Off The FDD
Do not let all that intimidation factors scare you off or cause you to not read the document and understand it. After you have gleaned everything you can from it and understand it as best you can, before you sign anything or pay any money, you should consult with an experienced franchise lawyer. Ideally you would talk with someone who, as a major part of their practice, advises and represents franchisees. Remember, most lawyers will not understand the documents you are looking at.
Find An Experienced Franchisee Lawyer
Give the FDD to your franchisee lawyer and expect to pay a fair price for them to review it and consult with you about it. An experienced franchise lawyer will be familiar with franchising and the structure of the documents and be able to focus in on the most important information without getting tangled in the weeds. The franchise attorneys at Bundy & Fichter PLLC can, generally, offer you the option of a fixed fee, which can reduce the stress of hiring a lawyer. Other firms may do the same.
Understand the Deal
Franchisors tend to present franchise investments as just the amount of the “initial franchise fee” and gloss over the remainder of the investment with words like “that’s what small business loans are for”. Those can be dangerous words. $30,000 or $50,000 in “initial fees” may sound very easy to do. However, after signing that contract, you are locked in. Now you have to find financing for the remainder of the investment—which often is as high as seven figures. You will learn that you have two sources of funds after your savings are exhausted. First, the equity in your home. Second, your precious retirement funds. If you have already signed the contract and written that “easy” check for the “initial fee”, you will face pressure from the franchisor to obtain the necessary financing, whatever the risk to your two most important assets. You are locked in and have little choice at that point. It is very important to understand the documents for the particular franchise you are considering and how much you will be locked in.
Hold Out For The Right One
Much like your mother told you in high school, you should hold out for the right one. Do not settle on the franchise in front of you if it is not right for you. Do what the FTC says and take your time. There are lots of other franchises out there, many of which may offer better deals. Like your father’s advice about marriage, you should not rush into the first relationship you are offered. Get to know the franchisor, get to know their competitors, get to know the industry and have an experienced franchise and small business attorney on your speed dial. A franchise might be right for you, but get the advice you need to go in with your eyes open and, if you are committing for life, be sure it is the franchisor you are confident you can wake up to every morning. Otherwise, that breakfast coffee can be mighty bitter.
The franchise lawyers at Bundy & Fichter PLLC would welcome the opportunity to hear from you. We never charge for that first call. We have a combined almost 50 years of experience representing franchisees and working with franchise documents. We even write the documents for some emerging franchisors. We would like to help you make the best decisions for you and your family.
Meanwhile, as a first step, please go to the following link and read what the FTC says about how to make your decision. https://www.ftc.gov/business-guidance/blog/2023/05/franchise-fundamentals-researching-franchise-opportunities?utm_source=govdelivery. Then, connect with Bundy & Fichter PLLC and we will work with you through the process of starting a business for you.