{"id":9173,"date":"2019-01-28T10:54:32","date_gmt":"2019-01-28T15:54:32","guid":{"rendered":"https:\/\/www2.franchisegator.com\/articles\/?p=9173"},"modified":"2022-08-04T17:01:48","modified_gmt":"2022-08-04T21:01:48","slug":"safeguard-against-franchise-fraud-12736","status":"publish","type":"post","link":"https:\/\/www.franchisegator.com\/articles\/safeguard-against-franchise-fraud-12736\/","title":{"rendered":"How to Safeguard Against Franchise Fraud in 2019"},"content":{"rendered":"

The case for buying, owning, and operating a franchise can seem quite compelling: You, at least in a sense, own your own business, but you\u2019re not alone during the operation. You have some latitude to operate independently \u2014 yet you also should have access to assistance from the franchisor. The product or service has already been fully developed; it\u2019s simply up to you to offer the product or service on your own terms (to an extent). <\/p>\n

That\u2019s not to say there aren\u2019t some challenges, however, and while it\u2019s surely easier than starting a business from scratch, the process of buying a franchise takes a serious amount of consideration. <\/p>\n

In 2019, one of the things you\u2019ll want to look for from the get-go when considering which franchise to go with is potential fraud. In other words, there are people out there offering fraudulent opportunities; and while you may think that it could never happen to you, fraudsters are getting more and more sophisticated in their methods of deception.<\/p>\n

What Is Franchise Fraud?<\/h2>\n

Common forms of franchise fraud include misleading and fraudulent sales practices used to entice prospective franchisees to purchase and invest in a franchise. Misleading sales tactics can come in many forms. One of the more common forms of fraud in the franchise arena is the making of false or misleading statements about projected financial performance. It is, in fact, unlawful for a franchisor to provide any representations of potential or actual financial performance to prospective franchisees unless the franchisor provides the information in the franchise disclosure document (\u201cFDD\u201d), along with certain required information.<\/p>\n

Additionally, franchisors or franchise brokers may induce a prospective franchisee to invest his or her life-savings in a franchise by making misstatements about the nature of the business, the nature of the support the franchisor provides, the time it takes to break even, or the uniqueness of the franchise system\u2019s products or services.<\/p>\n

How Do You Spot Franchise Fraud? <\/h2>\n

While franchise fraud may sound scary, there are signs that can help you spot it.<\/p>\n

Does it sound too good to be true? <\/h3>\n

If the franchise opportunity presents itself as \u201ceasy\u201d or \u201cquick\u201d through advertising, that\u2019s a telltale sign the offer may be fraudulent. While setting up a franchise can be easier than setting up your own business from scratch, they do indeed take work. Nothing in franchising is easy. <\/p>\n

Additionally, if success is presented at a \u201cdiscovery day\u201d and in franchisor marketing materials (even if only implicitly) as essentially a guarantee, a prospective franchisee should be cautious. Any sort of high-pressure sales tactics should also raise red flags for the prospective franchisee \u2013 if the franchise is that good, you likely have heard about it and can get positive reviews from current and former franchisees. <\/p>\n

When a sales person or a franchisor seems \u201cnice\u201d or like a \u201cgood guy or gal,\u201d this can be calming for a nervous prospective franchisee preparing to invest hundreds of thousands or millions of dollars in a franchise. Remember, however, that franchisors and franchise brokers are in the business of sales and while they very well may be kind people, at the end of the day, they are looking to make a sale, not make a friend. <\/p>\n

Finally, everything a franchisor or franchise broker tells you in the sales process is meaningless. Let me explain. When you sign a franchise agreement, in all likelihood, it is filled with disclaimers that essentially say: \u201cWe did not make any representations to you outside of the FDD and franchise agreement. If we did make any representations to you, they are not part of this agreement and you cannot rely on them in entering into the franchise agreement. If you do rely on representations that we made outside of the FDD, your reliance was unreasonable and such representations cannot serve as the basis for a fraud claim.\u201d This means that representations outside of the FDD should not be relied on and while there are ways around these disclaimers in many cases, courts often enforce them against franchisees pursuing common law fraud claims.<\/p>\n

For tips on setting up a franchise of your own, read: A Consumer\u2019s Guide to Buying a Franchise (FTC.gov)<\/a>.<\/p>\n

What does the franchisor disclosure document (FDD) include? <\/h3>\n

Under federal law, the person planning to sign any franchise agreement should receive a financial disclosure document at least two weeks prior to signing it and\/or handing over any funds. The document itself should contain 23 items, including:<\/p>\n