BUSINESS LAW 101 / Fraud in Starting a Business

By Albert L. Kelley, Esq.

Many people seek the American dream of opening their own business.  One of the quick ways of starting a new business is to purchase a franchise.  There are over 900,000 franchises in the United States and they account for 50% of all retail sales.  Franchises are not just fast-food restaurants; they also include hotels, car repair shops, retail stores, and even doctor’s offices among many other types of businesses.  Most of the times, the franchise offering is legitimate. However, occasionally the person selling the franchise, the franchisor, isn’t exactly truthful in their marketing.  The Florida fraud statutes address this situation. All franchisors are required to disclose certain information when offering a franchise. This information must be truthful.  They have to disclose the financial condition of the offering company, major lawsuits, and who the officers of the offering company are. But there are some things that are so crucial as to be criminal if they are misstated.  

First, the franchisor cannot intentionally misrepresent the chances of success of a franchise.   This differs from common law fraud which requires a misrepresentation of a current situation. Under the statute, the misrepresentation is regarding a future event.  This is more than a mere opinion; it is a false statement as to what is probably going to occur. If the franchisor makes statements about prospective revenues or expenses without doing the research necessary to back up those statements, it can be a violation.

Second, the franchisor cannot intentionally misrepresent the known total investment into the franchise.  In other words, if there are hidden costs involved, such as surcharges, fees, or other hidden costs, these must be fully disclosed. Franchisees expect to pay a franchise fee, royalty and/or fee to purchase specific merchandise.  However, there can also be charges for marketing. The franchisor may charge for training. All known fees must be disclosed to let the franchisee know what they are facing. 

Finally, the franchisor cannot misrepresent or fail to disclose efforts to sell or establish more franchises than the market can reasonably sustain.  Many franchisors give exclusive rights to territories. However, some franchises only grant a specific store, not a territory. This allows the franchisor to sell several franchises in a relatively small area.   In some cases, the franchisor merely wants the initial franchise fee and is unconcerned whether the franchise is actually successful. Their plan is to flood the area with more stores. These development plans must be disclosed to each potential franchisee.  

A violation of any of these is a second-degree misdemeanor.  However, the statute doesn’t stop there. It also gives the franchisee a civil cause of action against the franchisor.  This civil cause of action allows the franchisee to receive a judgment for all monies invested in the franchise, as well as attorney fees and court costs.  Interestingly, if you research this statute, there are no reported criminal cases, but several civil cases (to be clear, a reported case only means that a case was appealed.  There may have been many criminal cases, but if they were not appealed they are not reported).

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University.  He is also the author of four law books: (“Basics of Business Law” “Basics of Florida’s Small Claims Court”, “Basics of Florida’s Landlord/Tenant Law” and “Basics of Starting a Florida Business” (Absolutely Amazing e-Books)). This article is being offered as a public service and is not intended to provide specific legal advice.  If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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