The brochures are always slick and packed with optimism. They promise a big piece of the American dream -- a chance to own a business.
But those brochures and newspaper ads offering franchise opportunities seldom say anything about the dark side of golden opportunity; and that omission, often perfectly legal, can lead fledgling entrepreneurs into a lot of trouble, said Michael Seid, president of Growth Decisions Inc., a franchise-consulting firm in Dallas.
Franchising is a method of doing business. Its objective is to distribute goods and services as quickly as possible to as many people as possible. At the same time, it minimizes the business risks to the franchiser -- the parent company that authorizes the sale of its goods and services by licensing the use of its name and business techniques.
It's the risk factor that is often neglected in the sales pitches franchisers make to potential franchisees, the people buying into the business, according to legal experts on franchise law. The District of Columbia, Virginia and 14 other states have laws designed to minimize risks to franchisees -- mainly by requiring that franchisers provide information on earnings, business practices, expenses and other subjects.
The 1979 Federal Trade Commission Franchise Disclosure Rule also offers some protections. But the FTC law is often criticized for being too broad and the state laws too few in number to provide adequate safeguards. Also problematical is the lack of any uniform definition of what actually constitutes a franchise business, said Arthur I. Cantor, a franchise attorney with the Washington law firm of Brownstein Zeidman and Schomer.
There are 28 definitions of "franchise" -- two in the FTC Franchise Disclosure Rule and 26 in the state laws regulating franchises, Cantor said.
Those multiple definitions contain a great many trap doors for escape from franchise-law obligations, Cantor said.
The FTC rule is an example.
Many companies take a very narrow reading of the FTC rule in order to exempt themselves from federal franchise laws, franchise experts say. The FTC rule says a business must have three elements to be considered a franchise: It must license its retailers to use a common trademark; it must charge a licensing fee of at least $ 500 during the first six months of a franchisee's operation; and the licensing company also must exercise significant control over how the franchisee conducts its business.
But by leaving out one of those elements, a business that otherwise looks and acts like a franchise conceivably can escape compliance with the rule, according to Cantor and other franchise attorneys. Asking tough, specific questions is the potential franchisee's best defense against a franchiser's use of trap doors, Seid said.
"It doesn't matter if the franchiser is as solid as McDonald's Corp., you should always ask questions," Seid said.
The International Franchise Association, a Washington-based group representing franchisers, agrees. It has published a pamphlet, "Investigate Before Investing: Guidance for Prospective Franchisees." The 29-page book contains an extensive list of questions that should be answered before making a decision to buy a franchise. For information, write to the International Franchise Association, 1350 New York Ave., Suite 900, Washington, D.C. 20005. NATIONAL NEWSPERSONAL INVESTING; BUSINESS TYPES; COMMERCE LAWS