Investigate Before Investing

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INVESTIGATE BEFORE INVESTING
Guidance for Prospective Franchisees

By Lewis G. Rudnick Rudnick & Wolfe Chicago, Illinois and H. Bret Lowell Brownstein Zeidman and Lore Washington, D.C.

INTERNATIONAL FRANCHISE ASSOCIATION 1350 New York Avenue, N.W., Suite 900, Washington, D.C. 20005-4709 Reprinted 2002 REVISED - JULY, 1992

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CONTENTS The International Franchise Association IFA Code of Ethics What Is Franchising? Protect Yourself - Watch For The Warning Signals Evaluating The Offer The Franchise Business And The Prospective Franchisee What Are Your Qualifications? What Is The Product Or Service? - The Business Area? Who Is The Franchisor? The Company - Generally Trademarks And Copyrights Management Litigation Profit Projections Franchise Cost - Initial Fees And Cash Requirements Training And Start-Up Aid Location, Territory And “Exclusivity” Operating Practices, Assistance And Controls Premises And Equipment Rehabilitation Assignment - Franchisee’s Right To Sell Term, Renewal And Termination Competition With Franchisor The Contract Aids To Investigation 2 WASH1\4838466.1

4 5 6 8 9 10 10 11 13 14 15 17 17 18 20 23 25 28 32 33 34 36 36 37

Regulation Of The Offer And Sale Of Franchises Franchise Laws Business Opportunity Laws Conclusion About The Authors

38 42 46 49 50

The authors wish to express their appreciation to Mark A. Kirsch of Brownstein Zeidman and Lore and Kim A. Goodhard of Rudnick & Wolfe for their assistance in the updating and preparation of the 1992 edition of “Investigate Before Investing.”

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THE INTERNATIONAL FRANCHISE ASSOCIATION The International Franchise Association is a trade association representing firms in a wide variety of industries who use the franchising method of distribution. IFA was formed in 1960 by forward looking franchise company executives who saw a need for an organization that would serve the interests of firms involved in franchising. Since its founding, the Association has grown in numbers and stature to the point where it has become the voice for responsible franchising. Of primary importance to IFA is its effort to make membership connotative of the highest standards of business conduct. Membership applications are screened carefully and all members must pledge to adhere to a comprehensive Code of Ethics and Ethical Advertising Code. It is IFA’s intent that its trademark symbolize these standards. The Association shares the concern of its member companies that prospective franchisees or investors have at their disposal the maximum amount of information possible on which to base a business decision. This booklet, first published in 1970, reflects the desire of IFA and its members to assist you in properly and fully evaluating franchise offerings. It is not intended as a substitute for consultation with your attorney and accountant, but as an aid to all. Franchising today is one of the most innovative, dynamic and effective systems for distribution of goods and services the world has ever known. Well informed and satisfied franchisees are the backbone of this system, which combines the experience and expertise of the franchisor with the entrepreneurial drive and ambition of the independent business person. The rewards for both parties can be considerable, but it is essential to success that you first INVESTIGATE BEFORE INVESTING. We hope this booklet will help you in this task. IFA CODE OF ETHICS I. In the advertisement and grant of franchises or dealerships a member shall comply with all applicable laws and regulations and the member’s offering circulars shall be complete, accurate and not misleading with respect to the franchisee’s or dealer’s investment, the obligations of the member and the franchisee or dealer under the franchise or dealership and all material facts relating to the franchise or dealership. II. All matters material to the member’s franchise or dealership shall be contained in one or more written...
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