DOWNLOAD: Informed Investor Advisory: Franchises
WASHINGTON, D.C. (January 31, 2011) – As the unemployment rate continues to hover above 9 percent, the uncertainty of the job market may encourage would-be entrepreneurs to take their futures in their own hands by opening a small business. Investing in an established franchise can be an attractive path to becoming your own boss, but the North American Securities Administrators Association (NASAA) cautions investors to be mindful of the risks and realities of franchising.
“If you are thinking of investing in a franchise, you should educate yourself before you buy in,” said NASAA President and North Carolina Deputy Securities Administrator David Massey.
NASAA today issued an advisory for potential franchisees to alert them to important considerations before investing in a franchise. The advisory is available here.
“The first step before investing your money in any security or business venture is to do your homework,” Massey said. “For franchise investors, this means, at a minimum, reviewing the franchise disclosure document and getting in touch with current and former franchisees. You should be very skeptical if earnings for existing franchises are not disclosed and if experienced franchisees are unhappy or unreachable.”
Several states have laws regulating the sale of franchises to provide greater protections to prospective franchisees and prevent fraud in the sale of franchise offerings. NASAA recommends that investors in states with franchise offices contact the office to make sure the franchisor is registered and has not been the subject of franchisee complaints. Investors in states without franchise offices may check with another state’s franchise office or the Better Business Bureau. Information about state franchising offices is available on the NASAA website here.
NASAA also encourages franchise investors to retain legal counsel to help them understand the terms and conditions of their franchise agreement, which is drafted by the franchisor’s attorney and almost always gives the franchisor the advantage. Potential pitfalls for franchisees include no automatic right to renew the franchise after an initial term, liability for “future royalties” should the franchisee terminate the agreement early and requirements that disputes with the franchisor be resolved in the state where the franchisor is located, which may be inconvenient and expensive.
“If the franchisor makes any verbal promises or guarantees, make sure they are in writing, too,” Massey said. “Even if you have researched the franchisor and spoken with a number of successful franchisees, you need to protect yourself should your venture not take off as planned.”
NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.
For more information:
Bob Webster, Director of Communications
Leah Szarek, Asst. Manager of Communications and Investor Education