Entering the franchisee fray? Why you may need a lawyer

The economy has been in the news quite a bit as of late – and for good reason. Unemployment is at a near 20-year low, incomes are gaining ground and businesses are hiring at a feverish pace.

Chief among these indicators of a thriving business sector are franchises. According to the International Franchise Association, franchises that offer personal services – such as veterinary care and well-being assistance – is poised to grow the most in 2018 when compared to other franchise subsections, potentially as much by 3 percent compared to the previous year, The Wall Street Journal reported. In the U.S. as a whole, there are 780,000 franchise establishments, which account for $890 billion in annual economic output and 3 percent of gross domestic product, as separate IFA data showed.

Becoming a franchisee sure seems to be all the rage. But based on a recent study, you may not want to enter the franchise fray without consulting with a business lawyer first, as the start-up process can be quite the ordeal.

20 years of schooling to comprehend disclosure docs
On average, it takes around 20 years of education in business management to make sense of franchise disclosure documents. That's according to a research out of the City University of Hong Kong's College of Business, poised for release in November.

As noted by the WSJ, the Federal Trade Commission mandates franchisers make disclosure forms available to franchisees, which provide details on what it's like to be one. The problem with these documents, the study found, is they're loaded with legalese and jargon, making them hard to make sense of what's included. Not only that, but there's also a sheer large amount of reading material to parse through. Indeed, the researchers found that the median length of franchise disclosure documents runs around 229 pages.

The analysis was spearheaded by Uri Benoliel and Xu Zheng, the former a law professor at the College of Law and Business in Israel, with Zheng a professor of marketing at the City University of Hong Kong. They came to their conclusions after obtaining hundreds of disclosure documents in Wisconsin, one of a handful of states which makes them available to the public through the internet. As previously noted, disclosure documents are quite lengthy and run the gamut in terms of what they detail. For the sake of time, they confined their analysis to similar talking points among the 523 documents obtained, specifically particulars regarding territorial rights.

With the help of an electronic text editor analyzing the readability of sentences, Professors Benoliel and Zheng determined that being able to comprehend the disclosure information would require having completed 20.3 years of business schooling.

Perhaps the most troubling aspect of this, as the researchers and the Journal referenced, lies in the fact that the FTC requires that disclosure documents contain verbiage that reads "accurately, clearly, concisely and legibly in plain English."

University of Chicago law professor Omri Ben-Shahar, who specializes in disclosure, told the Journal that he was well aware of disclosure documents being eminently unreadable. The study confirms it.  And that's if franchisees bother to read them, which they often don't.

"[They're] mostly ignored; if noticed, unread; if read, misunderstood; if understood, unused; and if used, often in the wrong way," Ben-Shahar told the Journal.

Seek advice from counsel
So, what's the solution? Talk to the experts, according to Matt Haller, senior vice president of government relations and public affairs with the IFA. Haller noted that while disclosure documents are more reader-friendly than they used to be, speaking with a business lawyer can help prospective franchisees avoid running into roadblocks and parse information that is unclear.

As for the study's investigators, they contend the FTC ought to be more descriptive in terms of what makes disclosure documents truly comprehendible by using examples, and ought to do a better job with enforcement.

Here at Hudspeth Law Firm our motto says it all: The business of our firm is business. We offer practical advice in plain English. Given that our attorneys have run numerous types of businesses – franchises included – we'll help you make sense of complicated parlance and confounding phrases.

Categorised in: Business Law

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