How to Obtain a Franchise's Litigation History

Creation of a franchise requires extensive disclosure documents be filed and maintained for all prospective franchisees and the public to view, according to Federal Trade Commission franchise guidelines effective January 1, 1996. As a federally regulated entity, a franchise must provide all information requested by potential franchisees in a timely and concise way or risk prosecution. If the Uniform Franchise Offering Circular, (UFOC) is not provided to all prospective Franchisees within 10 days of actual subscription, the agreement will be considered in violation of federal law and subject to cancellation.

Difficulty: Moderate

Instructions

Things You'll Need:

• Computer with Internet access

1. Request a copy of the Uniform Franchise Offering Circular from the franchisor as soon as you begin seriously considering buying into a franchise agreement.

2. Examine all disclosure documents provided under Federal Trade Commission Law for evidence as to foul play or unsavory litigation history on the part of any member of the franchise's team you may become involved with. Federal law requires full disclosure of all legal and financial history for franchisors to protect investors from potential scams.

3. Enlist the assistance of an attorney specializing in franchise law when you have obtained all disclosure documents if you have any trouble understanding their contents. Be sure you know exactly whom and what you are becoming involved with, including detailed litigation and credit history, prior to signing any Franchise Agreement.

4. Know what red flag items to look for in the UFOC, such as a number of settled-out-of-court issues with former franchisees, which may indicate unprofessional practices. Read through several online examples as reference to familiarize yourself with what is typical and what should be questioned.

5. Ask the franchisor about its litigation history. Compare the answers you get with the information provided on the UFOC. Note any discrepancies and ask for clarification before signing as a franchisee.

6. Call other franchisees to obtain specific information pertaining to their litigation experience with the franchiser. Many times, litigation arises from small misunderstanding and is not an indication of truly unsavory business practice.

7. Check out Franchise411.com, which has more information on how to obtain records from franchise owners (see Resources below).

Tips & Warnings

• Take the time to conduct extensive research before you buy into a franchise, both on the industry and the players involved in the specific franchise you are considering. It's a good idea to spend at least several months in the research and planning phases.
• Visit the American Franchisee Association Web site for more information on obtaining a franchise's litigation history, as well as other key points of franchise law (see Resources below).
• Be leery of hard-sell techniques employed by untrustworthy franchisers who make every effort to distract you from conducting due diligence (reading carefully through your contract and understanding all potential liability) in order to take your check. Remember that failure to read a contract carefully does not limit your liability for its contents.
• Be especially careful at the ever-popular franchise conventions, where schemers tend to congregate.

Who Can Help:

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