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Connecticut Securities Division Helps Prospective Entrepreneurs Evaluate Franchise Opportunities

January 31, 2011

Investing in an established franchise can be an attractive path to becoming your own boss, but the Connecticut Department of Banking cautions investors to be mindful of the risks and the realities of franchising. “If you are thinking of investing in a franchise, you should educate yourself before you buy in,” said Banking Commissioner Howard F. Pitkin.

Today, the Department’s Securities and Business Investments Division issued an advisory for potential franchisees to alert them to important considerations before investing in a franchise.

“The first step before investing your money in any security or business venture is to do your homework,” recommends Pitkin. “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 Department of Banking 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.

“If the franchisor makes any verbal promises or guarantees, make sure they are in writing, too,” Pitkin advised.  “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.”

Connecticut regulates many but not all franchises under its Business Opportunity Investment Act.  The Department of Banking’s Securities Division maintains a list of registered and exempt business opportunities on the Department’s website.

Connecticut Securities Division Investment Advisory: Franchises
(pdf file, 180 KB)