Here at the AAFD, we consistently tell those who are interested in buying a franchise to do their homework. Franchisors are legally required to make presale disclosures to prospective franchise buyers. These disclosures are intended allow a franchisee to purchase a franchise with their eyes wide open, but franchisee advocates have long argued that important disclosures are not required, including financial disclosures about the profitability of the franchise system.

Investigative reporter Rick Rommel has recently identified another significant defect in the Federal Trade Commission presale disclosure rules. While franchisors are required to disclose any previous bankruptcies of their officers, franchisors do not have to disclose receiverships. Rommel wrote an article that was published earlier this month in the Milwaukee Wisconsin Journal Sentinel that discusses the case of Tazinos, a chain of all-you-can-eat pizza restaurants that recently registered to sell franchises.

According to the article, the owner of Tazinos previously owned a restaurant distribution firm that filed for a receivership in 2007. A receivership is a court proceeding where a court appointed receiver sells the company’s assets and distributes the collected money to the company’s creditors. Sound familiar? A receivership is very similar to a bankruptcy and may spring from the same set of circumstances – a company unable to pay its bills.

Unlike a bankruptcy, however, it turns out that a receivership does not have to be disclosed, nor was it disclosed in the Tazinos franchise disclosure to prospective franchisees.   A bankruptcy or a receivership in the past of a company’s officer raises pertinent questions about their ability to successfully manage a company. Franchisees should have the right to know this information.

After being contacted by the Sentinel for the article, the president of Tazinos amended the company’s franchise documents to disclose the previous receivership. Just because Tazinos did the right thing doesn’t mean other franchisors will, which means franchisees must be as vigilant as ever and do their homework before buying a franchise.

Read the full article, “Franchises not required to disclose receiverships” by Rick Romell.