How to Obtain a Franchise's Bankruptcy History

Federal Trade Commission regulations, effective January 1, 1996, require that all franchises furnish potential franchisees with legal documents known as the Uniform Franchise Offering Circulars (UFOC). These documents, designed as disclosure forums for the franchise's financial and legal history, provide a comprehensive look into the background and inner workings of the franchise to potential investors and participants, and are designed to prevent fraudulent and misleading claims by franchisors to potential franchisees. The increasing popularity of franchise conventions and sales, however, make it difficult for the Federal Trade Commission to verify all information provided on the UFOC disclosure documentation, so it is up to franchisees to verify and conduct due diligence and discovery for their own protection.

Difficulty: Moderate

Instructions

Things You'll Need:

• Computer with Internet access

1. Obtain the Franchise's Uniform Franchise Offering Circular documents from the franchisor as soon as you become seriously interested in subscribing to the franchise.

2. Budget at least 1 hour to examine the Uniform Franchise Offering Circular carefully for the bankruptcy history of both the franchise and its owners. Bear in mind that bankruptcy proceedings over a decade old may not appear on these documents or in the credit history of the franchise owners.

3. Verify a lack of bankruptcy proceedings indicated in the Uniform Franchise Offering Circular documents verbally with the franchisers, noting any discrepancy of information and dates as an indication of false intention. Trust is vital to any business arrangement. Protect yourself!

4. Ask permission to run a credit check on the franchise owners, or request a copy. Those with nothing to hide should comply with this request or offer a reasonable explanation as to why they cannot.

5. Run a credit check on the franchise and its owners to verify the accuracy of UFOC documents, for a slight fee, utilizing any online credit verification service. Save money in the long term when you obtain historical financial information in advance of signing a Franchise Agreement.

6. Hire a franchise lawyer to conduct your due diligence for you, if you can afford it.

7. Visit information Web sites like AllBusiness.com and Franchise411.com to learn more about obtaining a franchise's bankruptcy history and other aspects of franchise law (see Resources below).

8. Use the American Franchisee Association as an informational resource on franchise law (see Resources below).

Tips & Warnings

• Pour over every word of the Uniform Franchise Offering documents before you sign any Franchise Agreement! Remember that a bankruptcy is not always a clear indication of incompetence by the franchise's management team. Ask questions to obtain clarification on any hazy areas concerning financial history.
• UFOC documents are not always verified with the FTC, so you will need to exercise caution regardless of the information provided therein.
• Remember that you are liable for all of the stipulations included in your Franchise Agreement, whether or not you have read them or fully understand what they mean. This is why it's advisable to have an attorney with expertise in franchise law look over the contract before you sign it.

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