Information you need to know before you buy or sell a franchise

Okay, I have to admit that these articles make me hungry. I didn’t expect writing a newsletter would wreak such havoc on my dietary intake. I’ve eaten tons of BBQ, hot dogs, ice cream, spam, gnocchi, and those fabulous chocolate chip potato chip cookies.

franchisingNow I know how Jean Nidetch, founder of Weight Watchers, felt back in 1961. Jean was a 38-year-old “overweight housewife obsessed with cookies” who had struggled with her weight throughout her life. She tried everything to drop the pounds, and even going as far as checking herself into an obesity clinic as a last ditch effort to lose weight. Unfortunately, none of it worked.

Then one day she decided that if traditional weight loss methods weren’t working for her, it was time to come up with something new. Jean found the answer when she asked a few friends to help her form a group where they would combine a sensible diet with group support meetings. It wasn’t long before her small gathering of friends grew to a group of 40 women who would meet, talk about their progress, and keep each other accountable.

franchisingAfter losing 72 pounds, Jean attracted hundreds of people by word-of-mouth who wanted to join the group. The first meetings were held over a pizza shop where the shop’s owner couldn’t figure out why the hundreds of people lining up outside never bought anything. And, that was the start of Weight Watchers.

Today Weight Watchers holds over 40,000 meetings each week. They’ve become the world’s leading provider of weight management services. This year, Weight Watchers is celebrating its 50th Anniversary.

The overwhelming popularity of Weight Watchers led to franchising the operations and the brand. This allowed them to operate globally through a network of Company-owned and franchise operations. (Note: In 2004, Weight Watchers stopped selling its franchises and moved to an affiliate program.)

So What Exactly Is a Franchise?

franchisingA franchise is a business system in which private entrepreneurs purchase the rights to open and run a location of a larger company. The entrepreneur (franchisee) benefits by tapping into the resources, good will, and name recognition of the company selling the franchise. In exchange, the franchising company (franchisor) gains a larger footprint in the marketplace.

The franchisor signs a contractual agreement with the franchisee, explaining in detail the company’s rules for operating the franchise. In the United States, franchises are typically organized under state laws, although the Federal Trade Commission (FTC) requires franchisors provide full disclosure of franchise contracts in advance. This allows franchisees the opportunity to make a good business decision.

The Franchise Rule

The FTC (Federal Trade Commission) first introduced the Franchise Rule in 1978 (the Original Franchise Rule). Under the Original Franchise Rule, franchisors were required to provide prospective franchisees with an offering circular, referred to as the Uniform Franchise Offering Circular (UFOC), which described certain material details of the franchise offering.

In 2007, the FTC amended the Original Franchise Rule. Under the amended Franchise Rule, the Franchise Disclosure Document (FDD) replaced the UFOC as the document franchisors must provide to all prospective franchisees. While some of the disclosure requirements of the FDD are the same as those in the UFOC, the FDD imposes additional disclosure requirements.

Why We Need The Franchise Rule

The reason why there are rules about disclosure is so prospective franchisees can make an informed investment decision. It prevents deceptive and unfair trade practices in the offer and sale of franchises in the U.S. Most franchisees are entering into a long-term commitment of their time and money. With such a serious investment, it’s important they have all the facts so they can do their homework before purchasing a franchise.

An FDD must include disclosures in 23 categories, each of which are referred to as an Item.
The disclosures must be in plain English so it can easily be understood by a prospective franchisee. The franchisor must provide the FDD to the prospective franchisee to review for at least 14 days before requiring the franchisee to either enter into a binding agreement or seek a payment.

In addition to the Federal Trade Commission Franchise Rule, 15 other states have franchise disclosure laws: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.

Share This

Share this post with your friends!