The New York Law Blog: New York Franchise Law Basics: Top 4 Signs Of Fraud
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Thursday, June 16, 2016

New York Franchise Law Basics: Top 4 Signs Of Fraud

If you are thinking about entering into a franchise agreement in New York, then you should know the top 4 warning signs that should raise your awareness that there may be some fraud involved.

All of the laws in New York that are intended to protect potential investors in franchises are not meant to act as a substitute for good business sense, so be aware of these 4 issues that should raise a red flag in your mind:

  1. Failure to disclose necessary details: Under New York law, no offer or sale of a franchise can take place until the franchisor has registered franchise disclosure documents (FDD) with the state.  Sometimes called a prospectus, the FDD contains 20 different items of information about the franchise, the history of the company, required fees and investment costs, among other things.

    If you do not receive an FDD at least ten business days before you are asked to sign a contract or pay money to a franchisor, then you should be wary. Reputable franchisors in New York will not only offer it, but will ask you to sign and acknowledge receipt of it. Make sure the date is correct and that you keep a copy of the receipt for your records, as disreputable franchisors may back-date a receipt as a way to work around the 10-day rule. 
  2. High Pressure Sales Tactics: The reason that New York Law affords you ten days after receipt of the FDD is to afford you time to examine the disclosures and make an unhurried decision about whether or not to invest.  You should never feel pressured to buy a franchise in New York or be forced to make a rash decision.  You are the investor.  You are in control of your investment. 
  3. Claims of Minimal Risk and Unrealistic Profits: There is a risk associated with buying a new franchise in New York, no matter how successful a chain a franchisor may have. Be wary of guarantees of high profits with little risk - if it sounds too good to be true, it probably is. 
  4. Unjustified Start-Up Fees: Not only should you know what the initial fees are, but you should know if the initial fees include services or goods that the franchisor will receive before the business even opens. That is a red flag. You should also know if the fees are refundable.  Sometimes, crooked franchisors doing business in New York have sold franchises and skipped out of state with the franchise fee. 
The best protection for prospective investors in franchises in New York is to hire an attorney and to learn about franchise risks before you invest big money.
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*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com

Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.