OLYMPIA – The Washington State Department of Financial Institutions (DFI) is encouraging Washington residents contemplating participation in a franchise agreement to make sure they have fully researched the proposal — and clearly understand the risks involved — before finalizing any agreements.
The uncertainty of today’s 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 DFI cautions investors to be mindful of the risks and the realities of franchising.
“If you’re thinking of investing in a franchise, you should educate yourself before you buy in,” DFI Director of Securities Bill Beatty warns.
DFI has issued an advisory for potential franchisees to alert them to important considerations before investing in a franchise.
“The first step before investing your money in any security or business venture is to do your homework,” Beatty advises. “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.”
Washington DFI 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 you get those in writing, too,” Beatty adds. “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.”
Several states, including Washington, regulate the sale of franchises to provide greater protections to prospective franchisees and prevent fraud in the sale of franchise offerings. Beatty recommends that prospective investors contact the DFI to make sure the franchisor is registered and has not been the subject of franchisee complaints.
About DFI
www.dfi.wa.gov ▪ 360.902-8700 ▪ 877.746-4334
The Washington State Department of Financial Institutions regulates a variety of financial service providers such as banks, credit unions, mortgage brokers, consumer loan companies, payday lenders and securities brokers and dealers. The department also works to improve financial education throughout Washington through its outreach programs and online clearinghouse
About Division of Securities
www.dfi.wa.gov/sd ▪ 360.902.8760 ▪ 877.RINGDFI (746.4334)
The Division of Securities regulates securities investments, franchises, business opportunities, and off-exchange commodities sold in Washington and the firms and individuals that sell these products or provide investment advice. The Division handles complaints, conducts investigations, and takes appropriate enforcement actions to protect investors and combat fraud.
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Unfortunately, franchisors can impede a prospective buyer's ability to do meaningful due diligence. For example, CertaPro Painters gets many (most?) failed franchisees to sign a non-disclosure agreement which forbids them from saying anything negative about the franchise.
The FDD, of course, can also be grossly manipulated by franchisors. For example, CertaPro's FDD lists revenues for a portion of its franchisees--members of a 'flight group". When I was a franchisee, the "flight group" consisted of the top-performing franchisees.
But if a prospective buy examines the FDD in a serious, questioning, way, it is sometimes possible to find the red flags.
It's really a shame the FDD can simply one more tool franchisors can use to pull the wool over prospective buyers' eyes. It's all about "creative writing".
Then there are the reputation management efforts to bury complaints.
And the courts, which uphold franchise agreement clauses invalidating any and all lies they told you before you signed the contract.
Prospective franchise buyers are greatly out-gunned by the franchise hypesters.