Four Legal Issues You Should Know About When Purchasing a Franchise

Franchisees: Look Out for These Legal Issues


Owning a franchise can be a dream come true for those who’ve always wanted to be their own boss. But that dream can quickly turn into a nightmare if you invest in a franchise that goes bankrupt, is tied up in endless litigations, or worse – sues you.

The best way to avoid a bad investment? Know the red flags.

Here are four of them.

  1. BankruptcyIf a franchise company has filed for bankruptcy recently, you should question whether or not it will be financially capable of delivering on its promised support services. This information can be found in Item 4 of the franchisor’s Franchise Disclosure Document (FDD), which should be provided to you prior to the signing of any contracts.                                                                     
  2. Class action lawsuitsIn the FDD, under Item 3, you can find a franchisor’s litigation history. Look out for repeat cases of franchisees suing the franchisors, especially if they’re class action lawsuits or related to fraud.                                                                                                                                                         
  3. Lawsuits against franchisees Has the franchise company ever sued its franchisees in the past year? You can also find that information under Item 3. If the franchisor sued several franchisees due to failing to pay royalties, it may indicate that the franchisees weren’t profitable, thus making them either unwilling or unable to make payments.                                                                               
  4. Violations of franchise lawFranchising is regulated by the U.S. Federal Trade Commission and by the various state agencies. Generally speaking, the laws fall under two categories: state registration and disclosure laws, and state relationship laws. Violations could include selling an unregistered franchise (if required by your state), misrepresenting information to prospective franchisees, or improperly terminating a franchise. 

 

The wrong franchise could be more trouble than it’s worth. But the right one can be the opportunity of a lifetime.

Discover today if Fast-Fix Jewelry and Watch Repairs is the right fit for you!

Source: https://www.ftc.gov/tips-advice/business-center/guidance/consumers-guide-buying-franchise
             http://apps.americanbar.org/buslaw/blt/2010-03-04/grueneberg-solish.shtml

             http://franchiselaw.net/startups/usfranchiselawbasics.html

 
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