Legal options for a disappointed franchisee

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(FORTUNE Small Business) -- Dear FSB: I bought a franchise from a guy who verbally told me the business would do X dollars every month. I now realize he upsold his store, as the sales have been 30% less than he showed me. He also owns the POS (point of sale) system for the company, so any numbers he shows could have been modified to sell his store to me. What are my options? I am out of funds and have not earned a penny in income since purchase.

- Brett, Rancho Cucamonga, Calif.

Dear Brett: Find a franchisee-specific attorney, says Larry Beck of the American Franchisee Association, the industry's Chicago-based national trade association. The group's website contains several links to attorneys specializing in franchisee cases.

Begin by determining if what you purchased was a true franchise, says attorney Bruce Napell, a partner at Singler, Nappel & Dillin LLP in San Francisco.

"Basically, a relationship is a franchise if it passes a three-part test," he says.

First, does the business operate under substantial identification with the franchisor's mark? "That could be as obvious as calling yourself 'McDonalds' or simply selling a product with someone's name on it," says Napell.

Second: Did the franchisor provide a marketing plan? They need to offer some kind of guidelines, such as menus or uniforms and standard operating procedures.

Finally, the buyer must agree to pay a fee for the right to operate the business.

If what you bought is a true franchise, there are specific rules as to how it should have been sold.

"The main rule is that the seller has to give the buyer a huge amount of information in writing 14 days before they enter into the agreement," Napell says. If the only information you received was verbal, "it was clearly sold in violation of the law."

If so, and if the deal occurred within the past year, you have a pretty good case to unwind the whole transaction under the franchise-investment section of California corporation law, Napell says.

The seller's claims about how much money the franchise would earn might also help with legal action. Problems with inaccurate or incomplete earnings claims are one of the main reasons that franchising has become the subject of both federal regulation (the Federal Trade Commission's Franchise Disclosure Rule) and a number of state-enacted specific statues governing the offer and sale of franchises, according to attorney Pete Lagarias of Lagarias & Boulter LLP in San Rafael, Calif.

"Prior to the sale, the franchisor should not be making earnings claims unless they are put down in the franchise disclosure document," he says. "Franchising is akin to securities law in that you need to give a prospectus to buyer, the franchise disclosure document."

California is one of 16 states that has its own version of a franchise disclosure rule. It requires franchisors to register their offering in a circular and provide it to the buyer ahead of time (though there are some exceptions, notes Lagarias).

Both California and the federal rule state that sellers must substantiate any earnings claims they make. Your legal situation could depend on the claims.

"Typically, however, franchisors write in disclosure documents that they don't guarantee that anyone's going to earn money," Lagarias says. "They're written in an attempt to avoid liability. Your attorney will need to look at the particular legal rights and ramifications."