Some franchising basics from the FTC’s case against Premier Martial Arts franchisor

If you’re thinking of buying a franchise, you’re probably considering lots of factors — weighing benefits like training and brand name recognition with potential risks and costs. Like any other business, a franchise has no guarantee of success. That’s why franchisors are required to give potential buyers honest information about what it takes to open and operate their franchise. 

The Franchise Disclosure Document (FDD) has important details about upfront and ongoing costs, market competition, and the franchisor’s litigation and bankruptcy history. When information in the FDD isn’t complete or accurate, it can cost prospective buyers — small business owners — their hard-earned (and sometimes life) savings. 

According to the FTC, that’s what happened to more than 200 people, including veterans, who paid to open Premier Martial Arts franchises. The FTC charged the franchisor with misrepresenting potential earnings and making other claims that weren’t accurate or supported by the FDD — for example, that non-martial artists could profitably run their franchises working less than 15 hours a week. 

So if you’re considering buying a franchise, here are some things to know: 

• Franchisors aren’t required to provide sales or earnings information, but many do. Any claims a franchise seller makes about sales, income, or profits must be in Item 19 of the FDD. Franchisors must be honest about how much you’re likely to earn when you buy a franchise, and any information they provide in the FDD must be complete and accurate.
• The franchisor is required to give you substantiation if you ask. So ask the franchisor for written substantiation that supports the claims they make. An accountant or lawyer can help you determine whether the claims are reasonable.
• Franchisors must provide contact information for current and former franchisees. Talking to them may help you assess the franchisor’s claims and provide additional information that may not be included in the FDD. Reach out to as many of them as possible (here are some questions you can ask). 

For more, check out A Consumer’s Guide to Buying a Franchise.