Attorney General Gansler's Securities Division Helps Prospective Entrepreneurs Evaluate Franchise Opportunities
MD ( Jan. 31, 2011) - Investing in a franchise can be an attractive path to becoming your own boss, but Attorney General Douglas F. Gansler's Securities Division cautions investors to be mindful of the risks and the realities of franchising. The Division has issued an advisory for potential franchisees to alert them to important considerations before investing in a franchise.
“If you are thinking of investing in a franchise, educate yourself before you buy in,” said Attorney General Gansler. “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.”
“The first step before investing money in any security or business venture is to do your homework,” said Securities Commissioner Melanie Senter Lubin. “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.”
The Securities Division 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.
Several states, including Maryland regulate the sale of franchises to provide greater protections to prospective franchisees and prevent fraud in the sale of franchise offerings. Securities Commissioner Lubin recommends that prospective investors contact the Securities Division to make sure the franchisor is registered and has not been the subject of franchisee complaints.
The advisory is available at http://www.oag.state.md.us/Securities/NASAAFranchises.pdf. For more information, contact the Maryland Securities Division at (410) 576-7786.