Franchise Rules You Should Know

Abstract

Become a player in a growing business sector. There are few U.S. towns so small that they don't have at least one set of golden arches, to say nothing of Burger King, Wendy's and KFC. Franchises are clearly profitable businesses--but they can be tricky ones. Misunderstandings can sour the relationship for both franchisor and franchisee. Individuals and companies pour substantial capital into a franchise, so informed investing is critical. Two factors are essential for success: a careful assessment of the initial offer and a harmonious relationship between the parties. To fulfill their roles as key advisers to business, CPAs need to be aware of the latest franchising developments. Two documents in particular govern the formation of the franchise relationship: * The Franchise Rule of August 24, 1979, published by the Federal Trade Commission and reexamined by franchisors and franchisees in 1995. This rule applies to franchisers and franchise brokers and is the result of criticisms of deceptive and unfair practices. * The Uniform Franchise Offering Circular (UFOC) developed by the North American Securities Administrators Association (NASAA) and issued by the International Franchise Association (IFA). It was adopted September 2, 1975--and revised April 25, 1993--for states to use in franchising regulation. Development of the rules. In 1995, some 20 franchisor and franchisee representatives attended a workshop in Minneapolis. Franchisee representatives encouraged greater focus on creating a solid, harmonious relationship between buyer and seller, while franchisor representatives asked that potential franchisees become better informed about the ramifications of the franchise alliance. A broad consensus emerged to develop a more useful offering circular for investors. Accordingly, NASAA representatives encouraged the FTC to adopt a national disclosure standard, using the revised 1993 UFOC, that would be effective no later than 1995. This would replace the UFOC of September 2, 1975. KNOW THE RULES The UFOC is the principal disclosure document to guide prospective franchisees with their investments. The NASAA required its use effective no later than 1995, in response to criticisms from franchisee representatives, who said the 1979 rule for presale disclosure did not adequately address the ongoing franchisor/franchisee relationship. (The complete document, published by the International Franchise Association, can be obtained for $21.95 from the IFA in Washington, D.C., by calling 800-543-1038. The IFA has educational materials about the UFOC as well.) These revisions simplify the evaluation process and enhance the franchising relationship. The revised document addresses general instructions and 23 specific disclosure items. The most significant changes are Format and structure. Franchisors should disclose material facts in accurate and unambiguous language and avoid archaic and awkward legalese. (See exhibit 1, for a detailed list of suggested changes.) The document should be well organized, with tables when appropriate. Exhibit 1: Guide to Clear Language Language to Avoid Acknowledge and recognize Aforesaid Agrees Any and all Are and remain As an inducement for As between As part of the consideration As the case may be At a later point in time Binding upon and inure Consultation, assistance and guidance Each and every For and in consideration of the grant of the franchise Foregoing Forewith From time to time Further Giving rise to Hereby Herein Hereinafter Hereto Heretofore If necessary In no event In whole or in part It will be specifically understood that Manner in which Necessary and appropriate Offers to an individual, corporation or partnership Purporting to Thereafter Therefrom Thereof Thereunder Whatsoever With respect to Waste Language Avoid These Use Instead Arising from [right arrow] From As set forth in [right arrow] In As the franchisor prescribes [right arrow] You must Being offered [right arrow] Offers Commence [right arrow] Begin Consists of [right arrow] Is Engaged in the business of offering [right arrow] Offer If it becomes necessary for [right arrow] If In the event of [right arrow] If Inures to the benefits of [right arrow] Benefits Is given an opportunity to [right arrow] Can Is granted the right to [right arrow] Can Is required to [right arrow] Must No later than [right arrow] Within, by Not less than [right arrow] At least On behalf of [right arrow] For Precedent [right arrow] Before Provided that [right arrow] If, unless Related to or growing out of [right arrow] Because Sample, test and review [right arrow] Test Shall be no less than [right arrow] A minimum of So as to [right arrow] To So long as [right arrow] While Subsequent [right arrow] After Such [right arrow] This With the exception of [right arrow] Except Investments/restrictions/obligations. …