“The first step before investing your money in any security or business venture is to do your homework,” Beatty advises. “For franchise investors, this means, at a minimum, reviewing the franchise disclosure document and getting in touch with current and former franchisees. You should be very skeptical if earnings for existing franchises are not disclosed and if experienced franchisees are unhappy or unreachable.”
Washington DFI also encourages franchise investors to retain legal counsel to help them understand the terms and conditions of their franchise agreement, which is drafted by the franchisor’s attorney and almost always gives the franchisor the advantage. Potential pitfalls for franchisees include no automatic right to renew the franchise after an initial term, liability for “future royalties” should the franchisee terminate the agreement early, and requirements that disputes with the franchisor be resolved in the state where the franchisor is located, which may be inconvenient and expensive.
“If the franchisor makes any verbal promises or guarantees, make sure you get those in writing, too,” Beatty adds. “Even if you have researched the franchisor and spoken with a number of successful franchisees, you need to protect yourself should your venture not take off as planned.”
Several states, including Washington, regulate the sale of franchises to provide greater protections to prospective franchisees and prevent fraud in the sale of franchise offerings. Beatty recommends that prospective investors contact the DFI to make sure the franchisor is registered and has not been the subject of franchisee complaints.
About Division of Securities www.dfi.wa.gov ▪ 360.902.8760 ▪ 877.RINGDFI (746.4334)
The Division of Securities regulates securities investments, franchises, business opportunities, and off-exchange commodities sold in Washington and the firms and individuals that sell these products or provide investment advice. The Division handles complaints, conducts investigations, and takes appropriate enforcement actions to protect investors and combat fraud.
About DFI www.dfi.wa.gov ▪ 360.902.8700 ▪ 877.RINGDFI (746.4334)
The Washington State Department of Financial Institutions regulates a variety of financial service providers such as banks, credit unions, mortgage brokers, consumer loan companies, payday lenders and securities brokers and dealers. The department also works to improve financial education throughout Washington through its outreach programs and online clearinghouse www.dfi.wa.gov/financial-education. In addition to posting information about licensees and administrative actions, DFI uses the Web and social media to provide financial education information: www.twitter.com/FinEd4All ■ www.twitter.com/DFIConsumers ■ www.finlit.blogspot.com ■ www.youtube.com/user/WADFI ■ www.homeownership.wa.gov