5 Strange Things We Have Seen in Franchise Disclosure Documents
You might think that a franchise disclosure document is a fairly straightforward business document, but that’s not always the case. You may find some surprising passages in your franchise agreement that could cost you.
5 Franchise Disclosure Document Scams Hidden in Plain Sight
It’s not uncommon for unsuspecting franchise buyers to sign franchise disclosures that can defraud them or put them at a serious disadvantage in the future. Fortunately, we can show you some of the things to look out for and some actions you can take to protect yourself and your finances.
1. Oversized Documents
By using confusing or bloated franchise disclosure documents, scammers can hide damaging clauses. Franchisors may attempt to “bury” information that can run contradictory to any previously established agreement you may have made. Getting assistance reviewing larger documents could be worthwhile and save you in the long-term.
2. Overcharging Fees
It’s especially important to be fully aware of any fees you will be responsible for paying as part of a franchise agreement. You should take special care to review both the initial fees and the total fees section. This will allow you to determine your expected out-of-pocket costs, as well as your continuing liability.
3. Incomplete Documents
Prospective franchise buyers should also beware of franchise disclosure documents that don’t contain the necessary legal requirements under federal law. Federal law requires several key items, including the history of litigation, bankruptcy history, background information on the franchisor, franchisor financial statements, and initial and ongoing costs.
Scammers may try to avoid providing this information because it would reveal their business is not legitimate. This information can also be falsified, so verify franchisor claims to protect yourself.
4. Limited Business Experience
When examining the qualifications of your potential franchise partner, you should be critical of their level of business experience in the specific area in which the franchise operates. Make sure their experience matches your goals and performance expectations. Partnering with a novice franchisor without relevant experience can potentially expose you to greater risk.
5. Inaccurate Reporting of Earnings
Vague or overly inflated reporting of earnings could potentially cost you down the road if you are basing your business decisions on them. Always give extra scrutiny to earnings statements presented in franchise disclosure documents as they are the clearest indicator of the potential profitability of your franchise. Make sure to verify earnings claims by contacting franchisees.
How to Protect Yourself
If you want to properly protect your investments from fraud, scammers, and bad business ventures, you should consider consulting an expert in franchise law.
Franchise & Business Law Group has an experienced staff with a proven record of guiding franchisees through the buying process from start to finish. Our team is trained to identify potential scams and ensure that any franchise transaction is done properly and with a focus on your best interests
Set your franchise up for success by reaching out to Franchise & Business Law Group today.