BEFORE
YOU BUY A FRANCHISE
UNDERSTAND YOUR RISKS
Lisa Madigan
Illinois Attorney General
FRANCHISE BUREAU
500 SOUTH SECOND STREET • SPRINGFIELD, IL 62706
217-782-4465 • TTY: 217-785-2771

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Please call:
(217) 782-4465
TTY: (217) 785-2771
or write to:
Office of the Attorney General
Franchise Bureau
500 South Second Street
Springfield, Illinois 62706
PLEASE VISIT OUR WEB SITE WHERE YOU WILL FIND:
This booklet (“Before You Buy a Franchise”), the Illinois Franchise Disclosure
Act and Rules, and other information about the Illinois Attorney General’s office.
The address is: www.IllinoisAttorneyGeneral.gov & click on "Protecting Consumers" & "Franchise Information and Publications"

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A MESSAGE FROM THE ATTORNEY GENERAL
Franchising can provide mutually beneficial opportunities for businesses that
want to expand and investors who want the benefit of the franchisor’s leadership and
resources with an established product or service.
However, it is vital that as a potential franchisee you understand the obligations
and rights created by the Illinois Franchise law. Carefully research your franchise choices
before signing a contract or paying money to a franchisor.
The Franchise Bureau of the Attorney General’s Office administers the Illinois
Franchise Disclosure Act with the goal of encouraging business development, while pro-
tecting the interests of the franchisors, franchisees and Illinois residents.
Please carefully read the disclosure documents franchisors are required to provide
you with and, at a minimum, obtain answers to the types of questions raised in this book-
let before you buy a franchise. During your investigation of opportunities it is important
that you seek legal and accounting advice.
I am sure you will find this handbook helpful. My Franchise Bureau also stands
ready to assist franchisees and franchisors if there are any questions about the adminis-
tration of the Illinois Franchise Disclosure Act and Rules.
I would like to thank the members of my Franchise Advisory Board and the staff
members of my Franchise Bureau for assisting in the creation of this valuable publication
that every prospective franchisee should read.
Sincerely,
LISA MADIGAN
Illinois Attorney General
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WARNING
THE CONTENTS OF THIS BOOKLET ARE NOT PROVIDED FOR PURPOSES OF
GIVING LEGAL, ACCOUNTING OR FINANCIAL ADVICE TO THE READER. THE
PURPOSE OF THIS PUBLICATION IS TO PROVOKE THOUGHTFUL ANALYSIS BY
POTENTIAL BUSINESS BUYERS BEFORE THEY PAY MONEY OR SIGN CON-
TRACTS AND TO ENCOURAGE PROSPECTIVE FRANCHISEES TO SEEK PROFES-
SIONAL ADVICE THROUGHOUT THE EVALUATION OF FRANCHISE OPPORTU-
NITIES.
CAUTIONARY MESSAGES, QUESTIONS OR LEGAL PITFALLS PRESENTED IN
THIS BOOKLET ARE NOT THE ONLY LEGAL OR FINANCIAL ISSUES YOU NEED
TO BE CONCERNED ABOUT. READING THIS BOOKLET IS A GOOD BEGINNING,
BUT YOUR PROFESSIONAL ADVISORS WILL BE IN THE BEST POSITION TO
HELP YOU MAKE AN INFORMED DECISION.
You may contact the Attorney General for a copy of the Illinois Franchise Disclosure Act
(815 ILCS 705) and of the Rules under the Act (14 Ill Admin Code §200). That publica-
tion sets out the registration, disclosure and other obligations of franchisors and the
rights of franchisees:
Office of the Attorney General
Franchise Bureau
500 South Second Street
Springfield, Illinois 62706
(217) 782-4465 phone
(217) 785-2771 TTY
(217) 782-8827 fax
ALSO:
www.ag.state.il.us
Copyright © 1997 by the Illinois Attorney General
Published 02/97
All rights reserved. This publication may not be copied in whole or in part by any means, or stored in a data-
base or retrieval system, without prior written permission of the Illinois Attorney General.
Limited permission is hereby granted for not-for-profit reproduction and distribution of this publication and
is also permitted if no profit, direct or indirect, is derived therefrom and if all notices contained in this copy-
right notice are included with such copy, together with attribution to the Illinois Attorney General.
Address other requests for permission to the Illinois Attorney General.
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TABLE OF CONTENTS
Page
Attorney General’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
I.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.
What A Franchise Is In Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
III.
Know What A “UFOC” Is . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
IV.
Questions to Ask Before You Buy . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A.
Know Yourself First . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
B.
Know Your Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
C.
Know Your Franchisor . . . . . . . . . . . . . . . . . . . . . . . . . 7
D.
Questions to Ask Franchisees . . . . . . . . . . . . . . . . . . . . 9
V.
Understand Your Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
A.
Your Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
B.
Their Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C.
Location, Location, Location . . . . . . . . . . . . . . . . . . . . 15
D.
Territory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
E.
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
F.
Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
G.
Earnings Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
H.
Resolving Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
I.
Ending Your Franchise Relationship . . . . . . . . . . . . . . . 25
1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2. Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3. Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
J.
Contract Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . 28
VI.
Choosing Professional Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
VII.
Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
VIII. Franchising Factors To Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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B E F O R E
YOU BUY A FRANCHISE
Understand Your Risks
I. INTRODUCTION
Franchising is one of many ways that goods and services are distributed to con-
sumers, but instead of being wholly independent, franchisees enter a business and legal
relationship with franchisors in a desire to gain an advantage in the marketplace because
of the established good will associated with the franchisor’s trademarks and service
marks, and the franchisor’s expertise.
Properly researched franchise opportunities, matched with qualified franchisees,
will reduce the risk of failure. You will be spending your money and committing to
make future expenditures in a business relationship that can involve a significant part of
your productive life. In return, you have expectations based on:
1.
REPUTATION—The franchisor’s reputation for integrity and the
reputation of its product/service;
2.
A BUSINESS SYSTEM—The franchisor’s business system which
franchisees are typically required to follow;
3.
EXPERIENCE—The collective abilities of the franchisor’s manage-
ment now and over the years you are a franchisee; and
4.
THE FRANCHISE AGREEMENT—The specific provisions of the
franchise agreement itself.
Considerable time, effort and money are expended by franchisors and the Attorney
General’s Franchise Bureau to create and provide you with extensive disclosure of busi-
ness background information before you commit what may be a high percentage of your
life’s savings to enter into a franchisor’s system.
All of this effort to make you an informed buyer will be worthless if you do not
read all of this information and discuss your plans with your lawyer and accountant
before paying out your money or signing a contract. It is extremely unlikely that your
lawyer will be able to undo a contract you already signed. Responsible franchisors want
good franchisee relations, which start with you being well informed to guard against
“buyer’s remorse”, unnecessary misunderstandings and trying to enter a business for
which you are not suited.
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Throughout this booklet you will find highlighted boxes with “Red Flag”
warnings. Some of these “Red Flags” are statements you may hear
from a franchise salesperson or executive that are designed to divert
your attention from important rights which you have or to avoid deal-
ing with specific, significant issues.
Other “Red Flags” may refer to extremely important aspects of the
franchise relationship where you need to be sure that you have com-
plete information and the time to evaluate the answers you receive.
Keep asking questions and follow up until you get complete answers.
Take enough time to think about the answers to your questions and
decide whether you and your advisors are satisfied with the answers.
“You know this is what you want; you’re ready; we’re ready – you don’t
need an attorney to look over these things we’ve agreed to!”
You will also find references to items in the UFOC (Uniform Franchise Offering
Circular) after many of the questions. Some of the answers you need are in the UFOC,
but you should also speak directly with the franchisor, franchisees and your advisors to
be sure you have complete answers to each question.
The information that follows is directed toward Illinois franchisees and refers to
Illinois law and rules, but the suggested questions should be helpful for anyone about to
buy a franchise.
II. WHAT A FRANCHISE IS IN ILLINOIS
FRANCHISE DISCLOSURE ACT OF 1987
815 ILCS 705/1-44 (1995)
705/3. DEFINITIONS
As used in this Act:
(1) “Franchise” means a contract or agreement, either expressed or implied, whether
oral or written, between two or more persons by which:
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(a) a franchisee is granted the right to engage in the business of offering,
selling, or distributing goods or services, under a marketing plan or system
prescribed or suggested in substantial part by a franchisor; and
(b) the operation of the franchisee’s business pursuant to such plan or
system is substantially associated with the franchisor’s trademark, service
mark, trade name, logotype, advertising, or other commercial symbol
designating the franchisor or its affiliate; and
(c) the person granted the right to engage in such business is required to
pay, directly or indirectly, a franchise fee of $500 or more;
[PLEASE NOTE: the Act lists very limited exemptions after this definition
and other exemptions may apply to those portions of the Act related to
registration.
There are also Rules under this Act that further explain the various elements
of this definition. Copies of the Act and Rules are available upon request
from the Attorney General’s Office].
IT DOES NOT MATTER WHAT THE CONTRACT OR SALESPERSON CALL THE
BUSINESS RELATIONSHIP. IF IT MEETS THE DEFINITION OF A FRANCHISE, IT
IS A FRANCHISE, UNLESS IT IS EXEMPT FROM THE ACT.
*
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*
*
If you are considering a business purchase that appears to meet the definition of a fran-
chise, but when you call the Attorney General’s Franchise Bureau you learn that the com-
pany is not registered in Illinois, you should talk to your attorney and alert the Illinois
Attorney General. An unregistered franchise offered in Illinois not only violates the law,
but also indicates a lack of preparation that brings into question whether the franchisor is
capable of administering or maintaining a franchise system.
*
*
*
*
*
There are two times when a man shouldn’t speculate:
The first is when he doesn’t have any money;
the second is when he does.
Mark Twain
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III. KNOW WHAT A UFOC IS
The franchisor is required to give you a Uniform Franchise Offering Circular
(“UFOC” or “Offering Circular”). Their document tells you all about the business you
are considering. The franchisor must give you a UFOC at least fourteen days before you
either sign a contract or pay money to the franchisor.
The only documents you should sign initially are the “Acknowledgment of
Receipt” page (Item 23 of the UFOC) or other receipts showing you received particular
documents. Notify the Attorney General if you do not receive the UFOC before salespeo-
ple started trying to sell you their franchise.
The Federal Trade Commission (FTC) also requires that you receive copies of the
documents you are to sign at least fourteen days before signing them and the FTC
Franchise Rule requires that you receive a UFOC (or FTC format disclosure) at your first
personal meeting with the franchisor representative.
The UFOC is a vital document for you and your professional advisors to read
thoroughly. It has 23 “Items” that will provide many of the answers to the questions
below and because these UFOC reports are “uniform” it will be easier to compare fran-
chises. A UFOC Table of Contents will look like this:
TABLE OF CONTENTS
ITEM
1
Franchisor/Predecessor/Affiliate
2
Business Experience
3
Litigation
4
Bankruptcy
5
Initial Franchise Fee
RELATED ITEMS
6
Other Fees
7
Initial Investment
1-4, 13 & 14, 18-21 tell
8
Restricted Product/Services Sources
about the franchisor.
9
Franchisee’s Obligations
10 Financing
5-7 tell your costs to be a
11
Franchisor’s Obligations
franchisee in the system.
12
Territory
13 Trademarks
8-12, 15-17 & 22 tell what
14
Patents/Copyright
15
Management Requirements
you and the franchisor agree
16
What Franchise May Sell
to do.
17
Renewal/Termination/Disputes
18
Public Figures
19
Earnings Claims
20
List of Outlets
21
Financial Statements
22
Contracts
23
Receipt
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