Franchising Fraud

9/1/2001

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Franchising has become one of the most popular ways for individuals to start their own businesses. However, without carefully investigating a business before you purchase it, you may make an expensive mistake. While the majority of franchisors are legitimate, a number of them operate under false pretenses. In these cases, the victim may be subjected to fast-paced, high-pressure sales tactics and is often given fictitious sales projections, testimonials, and slick promotional brochures. He or she is urged to act immediately to take advantage of a "ground floor" opportunity. When the sale is completed and money collected, a number of incidents may happen: the scam artist may disappear with the investment; the franchisor may go out of business; products or services may turn out to be inferior, overpriced, or unmarketable; or specialized training promised by the franchisor may be insufficient. By the time victims realize they have been scammed, it's usually too late.

The Better Business Bureau suggests using caution as the best defense. Before you enter into a business arrangement, be sure you fully understand the responsibilities of all parties. Under the Federal Trade Commission rule, the seller is required to provide a detailed disclosure document at least ten business days before you pay any money or legally commit yourself to a purchase. This information includes identifying information about the seller, background information on the business and its officers, and substantial details on how the franchise agreement works, along with restrictions on such things as geographical boundaries or conditions on the right to sell or transfer ownership.

Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately "because prices will go up tomorrow," or "another buyer wants this deal," you should slow down, not accelerate, your purchase decision. A seller with a good offer does not have to use this sort of pressure.

If promises are made by a salesperson, be sure they're written into the contract before you sign. If the salesperson says one thing and your contract says nothing about the promise or says something different, your contract is what counts. If the seller balks at putting verbal promises in writing, you should be alert to potential problems. You might want to look for another business.

Unless you've had considerable business experience, you may want to get an attorney, accountant or a business advisor to read the disclosure document and proposed contract to counsel you and help you get the best deal.

Before doing business with any company, use the Better Business Bureau to search for a reliability report.

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