Fred Brown and Franchise Brief Gives Very Bad Advice to Franchisees
Here is some spectacularly bad advice, all the more so because it seems compelling. Franchise Business Opportunities | Finding the Right Information About Franchises
Fred Brown writes:
Franchisors are obligated by the Federal Trade Commission to fully disclose all material information about themselves according to federal law called the Franchise Rule. Some details might not be available until you sign on the dotted line, but they shouldn't intentionally withhold information. Most franchisors will not make earnings claims but they will provide information with which you may extrapolate gross sales.
This is true and I have written about how to calculate average gross sales over at franchise-chat, by doing some simple math on the financial data that is required to be dislcosed.
But then Brown makes a spectacular error.
The UFOC is not the only place to find this information, and you certainly shouldn't rely on it alone. You may also contact local chambers of commerce or business development organizations and see if they might supply information pertinent to your research.
You can only legally rely upon what is in the UFOC - if you try to rely upon other information, you will find that your reliance is not protected by the law.
This is counter intuitive, and as the discussion about the FTC Rule and Disclosure over at Blue Mau Mau showed.
The key is this: the UFOC contains everything that can be relied upon, but other extrinsic evidence from other sources may be used to test the truth of what is in the UFOC. But, those representations outside the UFOC cannot relied upon as part of the deal.
For example, if the Franchisor has no earnings claims, no Item 19 disclosure, then any information give to you, say by helpful franchisees, is not something that you can rely upon in the legal sense: you can give it weight or not in making your decision, but cannot form the basis of the representations that you are relying upon. It is not a term of the contract, either.
Comments
Michael, have you read all my article? Reading your comment, I really doubt you have read (or understood for that matter) even the first paragraph.
This article aims at giving an overview of what prospective franchisees should do before buying a franchise. I am not talking about the legal aspect of the franchise purchase.
Yes, the UFOC is the only document that you can rely on, on a legal aspect.
However, I am talking about due diligence process here, and during your due diligence, you will HAVE TO go further than the UFOC.
You say: "You can only rely upon the information in the UFOC, as a matter of franchise law."
By reading your comment, people may think that answers to all their questions may be found in the UFOC. Truth is you're not going to find all the pertinent information you need in the UFOC.
You will have to do your own research. This research includes talking to existing franchisees... So now, are you going to say that potential franchise buyers shouldn't talk to existing franchisees because it is not "protected by law"?? Are you going to say that I shouldn't seek advice from a CPA or franchise attorney because it is not "protected by law"????
The point here is to find all the right information before making the decision to buy a franchise. People looking to buy a franchise should gather as much information as they can before buying a franchise!
Posted by: FranchiseBrief.com | August 16, 2007 11:00 AM
Fred, I have read the whole article several times -just to make sure that I got it right.
Of course, you should look outside the UFOC for other information - but what sort of information are you looking for? This is critical - don't look for evidence that supports your current views.
Let me state my conclusion in a different manner: extrinsic information should be used to disconfirm hypotheses that you have formed about the franchisor. Otherwise, you will make a very important error: you will rely upon information that doesn't give you a legal leg to stand on, if that information turns out to be untrue.
Let me give you a different example: we are given the background of the franchisor executives in the UFOC. Would I do a background check? You bet I would -primarily to decide whether there were skeleton's in the closet. Even if I found a great deal of good things about the executives, I would know enough about franchise law to know that I could not rely upon that information.
Only put your trust in the UFOC reps-But always verify.
Posted by: Michael Webster | August 16, 2007 11:41 AM
Please see my comment at http://franchise.business-opportunities.biz/2007/08/14/finding-the-right-information-about-franchises/
Posted by: FranchiseBrief.com | August 16, 2007 1:00 PM