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Franchise Laws Protect Investors

Q: I am interested in buying a franchise. Are there laws that protect me in this situation?
A:
 The Federal Trade Commission (FTC) has a rule that requires a franchisor to provide detailed written disclosures to prospective franchisees. The franchisor must deliver these disclosures at least 14 calendar days before you sign any binding agreement with, or pay any money to, the franchisor. Ohio also has a law that protects franchises as discussed below.

Q: What type of information must the franchisor provide?
A:
 There are over 20 categories of information covered by the FTC rule. This includes history of the franchisor, fees the franchisee will owe, the investment required to start the business, training, the franchisee's obligations, the franchisor's obligations, termination, transfer, dispute resolution and other matters.

Q: Does the FTC check the accuracy of the franchisor's disclosures?
A:
 No. The FTC makes no review of the written disclosures. You will need to study the disclosures carefully. You also should consult with an advisor, such as your lawyer.

Q: What can I do to gather more information?
A: 
The written disclosures must list current franchisees and persons who ceased to be franchisees within the past year. You definitely should contact both current and former franchisees to obtain information and the benefit of their experiences.

Q: Does the FTC regulate the terms of the franchise relationship?
A: 
No. The FTC does require the franchisor to provide the franchise agreement along with detailed disclosures, but the FTC does not review the agreements. Because the franchise agreement will govern your franchise, you should study it carefully with an advisor.

Q: Can I rely on oral promises made by the franchisor?
A:
 No. Nearly every franchise agreement states that it is the entire agreement and there are no other promises or agreements. 

Q: How, then, can I make certain I have the benefit of oral promises?
A:
 You will need to negotiate the franchise agreement with the franchisor. You should insist that the franchisor include in the franchise agreement all promises that are important to you.

Q: Are there other documents I should review?
A:
 Nearly all franchisors have an operating manual. The franchise agreement usually requires the franchisee to do what is in the operating manual. Before buying a franchise, you should obtain and review the operating manual.

Q: Does Ohio have a law to protect me in buying a franchise?
A:
  Yes. The Ohio Business Opportunity Plan Law applies to many, but not all, sales of franchises in Ohio. The law prohibits misrepresentations, requires presale disclosures to the franchisee and provides for the right to cancel during the five-day "cooling off" following the signing of the franchise agreement.

Most importantly, unlike the FTC rule, the Ohio law provides franchisees with the right to sue for damaged (that may be tripled), attorney's fees and other relief. an Ohio franchisee who believes the franchisor did not comply with the Ohio law or did not comply with the FTC disclosure requirements may wish to consult an attorney concerning the Ohio Business Opportunity Plan Law.

4/20/2013

This "Law You Can Use" legal information column was provided by the Ohio State Bar Association. It was originally prepared by G. Jack Donson Jr., a partner in the Cincinnati firm of Taft, Stettinius & Hollister, LLP, and attorney Christopher A. Kuhnhein. It was updated by G. Jack Donson Jr. and attorney Margaret A. Lawson, a partner in the same Cincinnati firm.​​

Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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