On several instances, I've had clients who were dealing with franchisors domiciled in non-registration States, where the franchisors were using a Franchise Disclosure Document ("FDD")  that was not in compliance with the FTC Rule. In one case, the franchisor relocated from a Registration State to a non-Registration State and although I couldn't confirm the reason for the move, after reviewing the FDD I saw it was non-compliant. I could understand why he moved his location. Pure coincidence?

These situations are not reflective of the vast majority of franchisors that are compliant regardless of their location. Moreover, just because a franchisor is registered in a particular State doesn't mean its somehow 100% pure. Rather, my advice to prospective franchisees is to be very careful when reviewing the FDD and if its not registered in a State keep that in mind. An FDD that is not registered in any State has not been reviewed by a regulatory authority including the FTC.

Use qualified legal counsel, whether the franchisor is in NY or Ohio. Since a small number of  States like Texas and Florida require a filing but do receive or review the FDD, a franchisor could sell into Texas or Florida and use an improper FDD.I recently, saw an FDD that had an unaudited balance sheet with 25K in capital and the date of the balance sheet was 2008. Clearly, this franchisor was in violation of the FTC rule but because it was in a non-registration State no regulatory authority would see the document. There were other warning signs; the bad financial statements simply jumped off the page.

A simple approach is to ask the franchisor why they don't sell into New York, California or another registration State and note how they respond. If the franchisor is adjacent to a Registration State, has been franchising for a few years and is not registered it could be a red flag.

When reviewing a franchise opportunity be sure to pay attention to the entire FDD and use a franchise attorney during the process.