This brochure has been prepared by the Maryland State Bar Association’s Public Awareness Committee. It is intended to inform the public and not serve as legal advice.
Entering a franchise arrangement is one option to start your own business with minimum risk. Although some franchises offer tried and true plans for business opportunities, prospective franchisees must be wary of franchisers who appear to offer sure-fire methods for success while struggling themselves to stay alive in the market. The mere fact that a business is franchised is not a guarantee of its success. If you are considering entering a franchise agreement, be prepared to do the same research and careful planning that go with any start-up venture.
THINGS TO KNOW BEFORE CHOOSING A FRANCHISE
Before you decide that franchising is right for you, consider several factors. Investigating and closely comparing three or four franchisers will give you an idea of “norms” in the industry. Information about a franchiser and its expectations can be obtained from the franchiser and various governmental and trade organizations. As a prospective franchisee, you should obtain as much information as possible. The list below is far from being all-inclusive; however, it provides a guide for essential issues to evaluate:
ENTERING A FRANCHISE AGREEMENT
After narrowing down the field and deciding upon one or two franchises, carefully scrutinize the franchise agreements. Depending upon the franchiser, you should be able to successfully negotiate some terms of the agreement. Franchisers generally will not agree to major variations; however, the widely-held notion tha franchise agreements are nonnegotiable is not true. Below are some issues that may arise when reviewing franchise agreements. Although these issues will not arise until negotiations begin, keep them in mind when comparing franchises in the first stages of investigating business opportunities.
SOURCES OF INFORMATION ABOUT THE FRANCHISE
Obtain information from several sources. First, ask the franchiser for a list of all existing and past franchisees with names, addresses and telephone numbers, and call as many as possible. Ask questions about the business and about the franchisers representations. Any reluctance by a franchiser to provide this information should cause concern.
Next, each franchiser doing business in Maryland must register with the State. Registration requires the franchiser to file a disclosure document, called a prospectus, which contains important information describing the franchise. By law, the prospectus must provide pertinent details about the franchise offer, including the franchise fee or information about the way the fee will be set. Moreover, a franchiser must provide a franchisee with a copy of the prospectus and copy of any agreement involved in the sale of the franchise. Such copies must be provided either the first time the franchiser and franchisee meet, or within 10 days before any contract is signed or payment is made that relates to the franchise.
If the franchiser will not provide this information, you may contact the Office of the Attorney General to report this conduct and/or to obtain the prospectus, if one has been filed. You should also contact the Attorney General’s Office and/or a private attorney if the franchiser provides you with false or misleading information. Write or call: Securities Commissioner, Office of the Attorney General, 200 Saint Paul Place, Baltimore, Maryland 21202-2020, (410) 576-6360. You may visit the Attorney General’s website at www.oag.state.md.us; franchise information may be found under “Securities.”
And finally, the International Franchise Association (IFA), a trade organization located in Washington, DC provides information about franchise opportunities, individual franchisers and franchising arrangements. The IFA makes this information available to the public through a series of books, tapes and pamphlets. For a list of materials, write or call International Franchise Association, 1350 New York Avenue, Suite 900, Washington, DC 20005, (202) 628-8000.
Entering a Franchise Agreement © 1994, MSBA, Inc. Revised 2002
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