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Even at times of economic uncertainty, turnkey businesses continue to be an appetizing prospect for people serious about being their own boss.

For those unfamiliar with the phrase, a ‘turnkey’ franchise is essentially one where the franchisee can walk in on the first day, and in effect ‘turn the key’ on their new business.

This is because the business owner has provided virtually every element required to starting the business, arranging everything from site location to lease signing to construction of the unit to the purchase of essentials for launching the business, and even in some cases, the hiring and training the staff.

The popularity of turnkey business raises an interesting question for franchisors: are franchises turnkey businesses? The answer depends. Some franchises owners go out of their way to provide every resource for new franchisees. But the flexibility built into franchising means that some companies will leave the business preparation completely to the franchisee.

If you’re a prospective franchisee, you have the freedom to choose the opportunity that’s right for you. Perhaps you’re a first-time franchise owner and you’d like to eliminate all of the hassle from getting your business off the ground. In that case, a turnkey business might be the right opportunity. But maybe you’d like to micromanage your business and want a hand in every aspect of its preparation. Turnkey business might not appeal to you.

The beauty of franchising is that there are many different opportunities in a range of businesses. Turnkey businesses are just one kind of model. Franchises themselves aren’t necessarily a turnkey business, but if you’re looking for a turnkey opportunity, Franchise Direct will find the company that’s right for you.

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The book includes all the latest state requirements for franchise, tips for acceleratingthe  franchise registration process and a variety of information intended to help franchisors achieve compliance.

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The Federal Commission (FTC) mandates that the prospective franchisee must first acknowledge the receipt of the Universal Franchise Offering Circular (UFOC) 14 days before the Franchise Agreement can be signed or any money paid to the franchisor. What is the connection between the FTC and franchising?

The FTC was created in 1914 – an era that witnessed the rise of monopolistic business trusts that stifled competition. The FTC is charged with the mission to prevent unfair business practices that thwart competition in commerce. Over the course of the 20th century, the US government enacted more laws giving the FTC stronger authority in pursuing and enforcing “unfair an deceptive acts or practices.” It is the only federal agency that has jurisdiction over both consumer and competitive business interests in various sectors of the economy. Basically, the FTC acts as a watchdog to stop actions that interfere with consumers’ right to make an informed decision regarding business opportunities.

Since franchisors compete against each other to recruit franchisees, the FTC regulates how franchisors present themselves and their business proposition to prospective investor franchisees. The franchise investment process therefore must conform to the FTC’s Franchise Rule, which governs what franchisors must disclose to prospective franchisees before any contractual agreement is signed. This rule theoretically eliminates unfair or deceptive practices during the franchisee recruitment process.

The UFOC and 14-day rule are direct results of the FTC Franchise Rule, which as a trade regulation rule,  has the full force and effect of federal law. Federal and state courts have ruled that the Franchiser Rule can only be enforced by the FTC, who has the authority to seek injunctions, civil penalties, and compensation for consumers when businesses engage in deceptive practices.

The Franchise Rule basically imposes six different requirements regarding “advertising, offering, licensing, contracting, sale or other promotion” of a franchise:

1. Basic Disclosures: the Franchisor must give investors a basic disclosure document (the UFOC) 14 days before any contracts can be signed.

2. Earnings Claims: if the franchisor offers earnings claims, there must be a reasonable basis for doing so, and the proof that validates the claim must be supplied to prospective franchisee.

3. Advertised Claims:  applies to advertisements that make earnings claims, and mandates that such ads include the actual percentage of existing franchisees who have realized those earnings.

4. Franchise Agreements: the Franchisor must supply its standard Franchise Agreement along with any other contracts when it delivers the basic disclosure documents.

5. Refunds: Franchisors must refund deposits and initial payments according to the conditions regarding refunds detailed in the disclosure document.

6. Contradictory Claims:  this prohibits franchisors from making claims in any promotional materials or by word of mouth that contradict the information in the disclosure document.

Failure to comply with any of the six requirements makes the franchisor liable for Franchise Rule violations. Beyond these six basic requirements, the Franchise Rule also stipulates specific disclosures about the business relationship between the francshisor and franchisee, investment and fee requirements, trademark usage, and more.

The UFOC is the disclosure document intended to meet compliance with the FTC’s Franchise Rule. The FTC does have its own disclosure form, but most franchisors rely on guidelines established by the North American Securities Administrators Association (NASAA) for detailing the 23 items found in the UFOC.

A prospective franchisee should look at the UFOC as a combination Bible, dictionary, and encyclopedia that defines the franchise business, operations, finance, marketing, support – all the responsibilities and expectations of both the franchisor and franchisee. The NASAA requires that a UFOC be written in “plain English” and, though this seems helpful and logical, any prospective franchisee should seek legal advice from, and a thorough review of the UFOC document, by an lawyer experienced in franchise contract law.

The Franchise Agreement is a legal contract and is actually part of the Universal Franchise Offering Circular (UFOC), which is supplied to prospective franchisees. The UFOC spells out everything about franchise operations – processes, marketing, costs, support etc. in 23 specific items. The Franchise Agreement is included in item #22, along with any other contracts that must signed, such as real estate leases or financing forms. The Franchise Agreement is attached as an “exhibit” and has blank spaces to be filled in preparation for the franchisee signing the contract.

The UFOC ends with a receipt that carries no obligation to the prospective franchisee – it just validates that the franchisee has received the UFOC. No money can be exchanged or a Franchise Agreement signed until ten days after acknowledgment of receipt of the UFOC. There is also a five-day waiting period for the signed Franchise Agreement once it is completed

After a prospective franchisee has reviewed the UFOC with an attorney and accountant, and is ready to sign the Franchise Agreement, the franchisor will fill in the blanks on the Agreement. These will stipulate in dense legal jargon the relationship and obligations between franchisor and franchisee. Once the Agreement is filled in with the details, the franchisee has five days to return the signed contract.

As part of the UFOC, which the franchisee acknowledges receiving, the Franchise Agreement spells out specifics on the initial franchise fee, ongoing fees and royalties, training and length of the contract. All of these should be examined and compared to the UFOC items. The Franchise Agreement should reinforce the obligations and expectations described in the UFOC.

Because the Franchise Agreement is the binding legal contract between the two parties, any deviation from the UFOC must be added to the Franchise Agreement. For instance, if the Franchisor is willing to make an exception regarding premise requirements, or if the Franchise Representative promises extra training or support, then make sure it is in the Franchise Agreement contract. Verbal promises are worthless. The Franchise Agreement, as part of the UFOC, implies that everything stated in the UFOC is part of the Franchise Agreement. If the franchisee negotiates exceptions that differ, even if only slightly, from the UFOC descriptions, then these negotiated exceptions must be detailed in the Franchise Agreement.

The Franchise Agreement is the legal document that governs the relationship between the Franchisor and Franchisee. In the case of any disputes, the Franchise Agreement is the ruling factor about the outcome. That is why it is so important to have an experienced franchise attorney review the UFOC and compare it with the Agreement terms.  The Franchise Agreement should match the UFOC items regarding fees, territory, training and duration of the franchise contract, and any exceptions to those items must be described in specific detail within the Agreement.

To find an attorney knowledgeable about franchise contract law, visit this link.

Click on the Franchisee tab at top, then go the listings at left. At the bottom, you’ll see a tab for attorneys. This takes you to a state-by-state directory of franchise lawyers.

Another helpful source for information is the International Franchise Association.

The Federal Trade Commission oversees franchise contract law, and the Agency’s web site has a Consumer Guide to Buying a Franchise, plus a Franchise Rule Compliance Guide.

The purpose of this article is to provide general information about recent developments in franchising. Nothing in this article constitutes legal advice, which can only be obtained as a result of personal consultation with an attorney.