The Fraud
Franchising refers to an arrangement in which a party, the franchisee, buys the right to sell a product or service from a seller, the franchisor. The right to sell a product or service IS the franchise. At the heart of any franchise is the formal franchise agreement, a critical legal document.
Legitimate franchises are an excellent way for a person to get into a small business with a good chance of success. The franchisor has developed the concept, suppliers, marketing and promotion strategies, site selection, and feasibility studies.
The franchisee benefits from the experience of the franchisor and pays a franchise fee as well as a percentage of sales or a royalty in return.
But . . . you must investigate before you invest in any franchise!
Deceptive franchise scams are especially concentrated in "opportunities" like medical billing, work from home and make $2,000 a week, vending routes, and "be your own boss."
The Flaw
Fraudsters misrepresent everything and anything about the franchise: revenue potential, site evaluation, traffic patterns, operating costs, quality of merchandise, and their expertise. Anything it takes to get your money upfront. They rely on the fact that, as the old saying goes, "there's one born every minute."
The Fix
Investigate before you invest! There is no substitute for due diligence.
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In the Business Tools area is a checklist that gives you a laundry list of things to check when doing your due diligence on a franchise offer.
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The Federal Trade Commission provides a detailed example of what you should know before you invest in any franchise.