The Facts

• Prior to 1987, the lack of legislation determining the relationship between franchisor and franchisee in Illinois created room for potential corruption. As a result, numerous business owners looking to purchase franchises found themselves in financial trouble because the actual costs of the franchise were not clearly specified. To remove these issues, the Illinois legislature passed the Franchise Disclosure Act of 1987, which states that all financial obligations that occur during franchising must be disclosed without ambiguity.
  
  

Significance

• Due to the Illinois Franchise Disclosure Act, the various fees that occur during franchising transactions must be explained as clearly as possible. For example, franchisors must designate the specific franchise fee, as well as other fees that include the transfer fee (different from the franchise fee), indirect franchise fees, and equipment fees. Clarified explanation of these fees allows potential franchisees to know whether they can actually afford the business.
  
  

Requirements and Exemptions

• For all franchises worth less than $5 million, the attorney general's office requires full legal documentation in order to register the franchise. In other words, at the time of the franchise transaction, franchisor and franchisee must send compliance paperwork to the attorney general's office for review and registration. For franchises worth between $5 million and $15 million, franchisor and franchisee may pay a fee of $500 for a franchise exemption -- in other words, making the franchise exempt from most rulings of the Illinois Franchise Disclosure Act.
  
  

Amendements

• The Illinois Franchise Disclosure Act was amended in October 2009. Specifically, the attorney general's office ceased to register franchise brokers, leaving the responsibility of providing all legal documentation to the franchisor. Additionally, franchises worth $15 million or more no longer had to register legal documentation with the Illinois attorney general's office.
  
  

Considerations

• The Illinois Franchise Disclosure Act was designed to protect both franchisor and franchisee by requiring that all financial elements of the transaction are clearly stated. The act cannot ensure that potential franchise owners have the financial ability to afford the franchise. Rather, the act seeks to make the financial requirements as transparent as possible. Potential franchise owners should, therefore, review all fees carefully to make sure that they are able to pay them.