Franchise Disclosure Documents (FDD), under the new FTC Franchise Rule remain a good concept in theory. Unfortunately, reality plays a more important role and reveals a completely different picture.
These are some of my observations on the basis of twenty-eight more years of experience in the franchising industry as a franchise attorney, franchise expert and former franchise owner. During this time, I have drafted, reviewed and negotiated over 500 Franchise disclosure documents.
Disclosure of the objectives of franchise
Disclosure Document or FDD franchise (formerly known as Uniform Franchise Offering Circular) is a document containing information twenty-three chapters. These disclosures are intended to give prospective buyers well in advance of the franchise sales information on a smart investment decision for a franchise can be done before long-term contracts are signed, money changes hands and sizeable financial commitments are made. In most cases, a franchise investment is long-term financial consequences. This means putting everything on the line – savings, retirement accounts, home equity, etc. With all this at stake, it is easy to see why the information in the FDD are so important.
Aura of credibility
Attached as annexes to the FDD are the franchise company’s audited financial statements, franchise, and a list of working (and left) franchise owners. If the company chooses to make a franchise “Earnings claim” that the information will be given in both the number 19 or attached in another exhibition. The whole document is quite long and may exceed several hundred pages. In some states (known as the franchise registration states like California, New York, Illinois, etc), the FDD will be referred to register with the state. All these procedures creates an aura of credibility. Many buyers assume a franchise regulatory body has reviewed and approved the franchise bid. Companies involved in unscrupulous franchise blatant misrepresentation, referring to his franchise record with a state of the state “seal of approval.” Nothing could be further from the truth.
Franchise Registration Realities
First, the registration of a company only franchise disclosure documents that have paid a fee to a government and presented his paper. There are no rules for a franchise company must meet before they can sell the franchise, such as business experience, financial stability, operating a successful prototype for a certain period of time before the franchise, etc.
Business experience and financial stability?
You and I could not have experience in a business concept, and never worked a prototype. All we have is an idea of the franchise, leaving it to other people (buyers franchise) risk their savings, homes, etc. to see if our idea pans on the market. All we need to do to collect franchise is a franchise disclosure documents, and to capitalize our new franchise corporation or LLC. Say you do not want to risk anything to ourselves, so we decided to take advantage of our new society free of only $ 1. After producing an audited financial statement (showing $ 1 cash and securities issued by $ 1), and the inclusion of the financial disclosure documents of our franchise, we will be able to sell franchises with impunity and collect our $ franchise 50,000 payment each time you sell a franchise.
Franchise Registration States
Of course, in the U.S. There are about 14 states where the registration of our franchise has to pay a registration fee and submit the document with the state agency. But that’s just a rubber stamp and not be denied state registration to register our franchise offering. Because we are “thinly capitalized” these states may require a security deposit on the condition that do not receive the franchise fee until the franchisee opens for business. O record of these states can say that we can not accept payment of the franchise fee until the franchisee opens, and require a simple amendment to our franchise agreement to reflect this condition. That is the trend here in California and the bottom line is we get “registered”.
Even franchise examiners (who are usually lawyers) in the matter of registration of renewal of registration under the orders of franchise companies have been operating a couple of years for which audited financial statements and say (in a brief footnote) “Since its inception, the franchise company has incurred a net loss of $ X million. These and other factors indicate substantial doubt the Company will be able to continue as a going concern.” Translation: the auditors are saying the company willing to go broke. Results: Do not worry, the examiners of the franchise renewal issue orders allowing them to sell to unsuspecting buyers of franchises. It is not correct, in fact, it’s shocking, but true.
Franchise Registration States not; FTC to the Rescue?
The balance of the non-registration states (36) we can sell franchises with impunity and without regulatory oversight. Of course, there is the Federal Trade Commission FTC franchise rule that applies in all states. But this is only required to produce a franchise – FDD. There is no registration process with the FTC and rarely participate in franchise complaints. A 1993 government report found the FTC acted on less than 6% of all franchise complaints. U.S. General Accounting Office reports that complaints to the FTC franchise franchise owners increased ten-fold from 1997-1999. This dramatic increase is profound examination of the complaint data was only available until June 30, 1999. Since 1998, according to the FTC’s website, only a franchise application to take action against a business franchise. Simply not enough money or resources available to the FTC, a situation which only grow worse in the current economy.
My point here is the registration of a franchise disclosure document with a government agency only by the franchise company paid the fee and sent the document. There is no due diligence done by the examiners in a state registration. Thus, the true keeper of the franchise investment should be – the franchise investor. Due to the complexity of the franchise and offering circular revelations the need for competition, professional advice is essential. Many of the critical disclosures are required only in a table, in which sections of the contract “boilerplate that bites” are listed, without going into “details”. If you’re not a lawyer looking for red flags franchise, it’s easy to deceive.
Equilibrium point
Turning to the disclosure of documents of the franchise, business-critical information is not disclosed in the document, mainly because of pressure from the industry of franchising. For example, the time it takes to reach the point – where revenues cover the costs – is not required disclosure of any document franchise. A bank will never loan money without that critical financial stage, however, let corporate franchise franchise buyers to invest hundreds of thousands of dollars, often mortgaging their homes and take advantage of the savings and retirement accounts. What kind of financial milestones required to disclose prior business franchise franchise buyers risk which is often all they have? The relevant disclosure, Section 7, requires only an estimate of what is called “additional funds”, an estimated 90 days of working capital needs. Since many new franchises can take a year or two more years to reach the equilibrium point, just knowing what’s going to take to get through the first 90 days is not helpful – in fact, you can set to financial suicide . If you do not have sufficient working capital to reach the equilibrium point, which may be a year or more in the way, the whole franchise investment go down the drain.
Other financial results for franchise owners
Another major shortcoming of disclosures in the Franchise Disclosure Document is not saying that the amount of money in the franchise network are doing. Instead of responding to what is the most important investment decision in a franchise, franchise disclosure laws that this “optional” for the franchise – who can say if they wish. If you decide to answer this critical question, it will be in line 19. But do not hold your breath – more than 90% of franchise businesses choose not to answer this question. It’s another bizarre reality in the world of franchising. Because they require complete monthly (and in many cases, weekly) financial profit and loss statements from their franchise owners, franchise companies know exactly how much their franchises are making (or losing). However, over 90% choose not to say anything before you buy one of their franchises.
Current asking Franchise Owners
Of course, the current owners of franchises are a potential source of information and a list of these are exposure to the Franchise Disclosure Document. My experience is most franchise owners overstate its financial results or refuse to share their finances with a stranger. Many of them have spoken with over 28 years or more say they are making good money, when a consideration of its financial statements, whether they showed the loss of money or operating at or below minimum wage performance . A couple invested $ 200,000 in a pizza franchise and are desperate to sell eighteen months later. Its financial statements showed that they were about $ 0.50 (fifty cents) per hour. Fortunately, my client quickly lost interest in buying the franchise after listening to my analysis. The incredible thing is that I discovered the franchise was sold to another person who operates the business over a year later filed for bankruptcy. There are many more examples of this type of franchise nightmares. Franchise “ins”, where profitable franchises sold and another is a strange fact in the world of franchising.
