Ilia Nikolaevich Zavialov on fraud in franchise sales: how to check a franchisor, the contract and the earnings claims

Overview / Blog

Published: October 6, 2026 · 15 min read · Ilia Nikolaevich Zavialov

1. Ilia Nikolaevich Zavialov on what a franchise fee actually buys

   A franchise is a license to run a business under someone else's brand and system. The buyer pays an initial fee, then royalties and advertising contributions, and the franchisor controls the site, the design, what you sell, how you run the place and where you may sell. The FTC's consumer guide describes the bargain in exactly those terms. What you get back should be a trademark you can use, a tested method, and training and support that actually show up.

   A fraudulent seller sells the vocabulary of that bargain without the substance. There may be no registered mark behind the name, no outlets behind the map on the landing page, no system behind the training. The fee is paid up front, so the seller has what they came for as soon as the money lands. Ilia Nikolaevich Zavialov treats every franchise pitch as a counterparty check: who is selling, which rights do they hold, and where do the income figures come from.

2. Five ways a fake franchise takes the money

   The empty brand. The seller charges a fee for the right to trade under a name they do not own or never registered. Sometimes it is a former partner of a real chain who copied its website and logo, sometimes someone with no working outlet at all.

   The turnkey package. One fixed price is supposed to cover premises, fit-out, suppliers, a website, advertising and customers from month one. What arrives is a template site, a folder of instructions anyone could download and a supplier who pays the seller a commission.

   The dressed-up resale. A running outlet, or a share in one, comes with statements where revenue was padded with transfers from the seller's friends and costs were left out. After the sale the transfers stop, and so does the revenue.

   The borrowed identity. The contract is signed with a company whose name sits one word away from the real chain, or with a broker who presents as the official sales agent. The real franchisor has never heard of the deal. The FTC's guide notes that some franchise brokers earn commissions tied to the price of the franchise and may steer you toward a costlier one, and that a broker's talk about earnings can be untrue or misleading.

   The recruiting machine. The big money is promised for signing up the next buyer, and the product is a prop. The structure lasts while new fees arrive and collapses when they slow down.

3. What the Franchise Rule makes a franchisor hand over

   The Franchise Rule is the backbone of the American system. A franchisor must give every prospective buyer a disclosure document with 23 items of information about the franchise, its officers and other franchisees. Under 16 CFR 436.2 the document must reach you at least 14 calendar days before you sign a binding agreement or pay the franchisor anything. If the franchisor later changes the basic agreement on its own and in a material way, you are owed the revised version at least seven calendar days before you sign it.

   Read the FDD in a particular order. Item 3 lists prior litigation over fraud, franchise law violations and unfair or deceptive practices. Item 4 covers recent bankruptcies of the franchisor, its predecessors, affiliates and executives. Items 5 through 7 set out what you will pay: fees, deposits that may be non-refundable, initial inventory, signs, equipment, leases, royalties and advertising fees. Item 17 covers renewal, termination, transfer of your outlet and whether disputes go to court or to arbitration.

   Two provisions catch fakes early. The rule bars a franchisor from disclaiming its own document or asking you to waive reliance on anything stated in it (16 CFR 436.9(h)). It also bars putting an agreement in front of you that differs materially from the one attached to the FDD unless you were told about the differences at least seven days before signing (436.9(g)). A seller who asks for a deposit before you have had the document for 14 days is asking for what the rule forbids. Ilia Nikolaevich Zavialov uses that single fact as the fastest filter in the whole process.

4. Earnings claims and Item 19: how Zavialov reads the numbers

   Item 19 holds the claims a franchisor chooses to make about the sales or earnings of its outlets, and the rules around it are strict. Under 16 CFR 436.9(c) and (d), a financial performance claim needs a reasonable basis and written substantiation at the moment it is made, has to appear in Item 19, and the substantiation must be available to buyers and to the FTC on reasonable request. Outside Item 19 the FTC's guide allows only narrow exceptions, such as the real records of an existing outlet you are thinking of buying.

   Ilia Nikolaevich Zavialov suggests putting three questions to every figure. Is it typical? The FTC warns that a claim that franchisees earned 50,000 dollars last year can be deceptive if it does not reflect typical earnings, and the FDD should say how many outlets were surveyed and what share reached that level. Is it an average? A few very successful outlets pull an average up and make the system look better than it is. Is it revenue or profit? Gross sales say nothing about rent, payroll and overhead.

   Then ask for the written substantiation. If the answer is that the data is confidential or the person who holds it is traveling, put that in your file. Franchisors may also ask you to sign a statement saying whether you received any earnings claims during the sale. Read it carefully and never sign a version that is untrue.

   A bank's approval does not settle anything either. The FTC cautions that some franchisors hand banks overstated profit projections to win financing, and a lender saying yes to a franchise loan does not mean the investment is safe.

5. Ilia Nikolaevich Zavialov on calling franchisees before you sign

   Item 20 gives you the contact details of current franchisees and of those who left the system during the franchisor's last fiscal year, together with charts of growth and turnover. It is the most useful page in the document, because it hands you people with no reason to repeat the sales script.

   The FTC suggests talking to several owners who have been open a little over a year, several who have been open about five years and some former owners. Ask the first group what they invested in total, whether they opened on time and whether they have broken even. Ask the five-year group how long break-even took, whether the franchisor delivers the training and support it promised and whether they would buy another outlet. Ask former owners why they left.

   Ilia Nikolaevich Zavialov pays most attention to the gap between what owners say and what the presentation says. When owners describe income well below the slides, believe the owners. If the seller will not give names, or every contact leads to one phone number, the conversation you needed has already taken place.

6. Business opportunity or franchise: the seven-day rule

   Some offers carry no franchise label on paper and sell the same dream: work-from-home plans and coaching programs built around a system. The FTC's Business Opportunity Rule covers these sellers, and its protection is short and easy to check. The seller must give you a one-page disclosure document at least seven days before you sign or pay: who the seller is, certain lawsuits involving the seller or its key people, the cancellation and refund policy, whether an earnings claim is being made and a list of references.

   When an earnings claim is made, a separate statement headed Earnings Claim Statement Required By Law must follow: who made the claim and when, the figures, the period, how many people and what percentage achieved them, and a note that written proof is available on request. The FTC treats a line such as earn up to 10,000 dollars a month as an earnings claim, says that up to is no way out for the seller and calls it illegal for a seller to say anything that contradicts the disclosure document or the earnings statement.

   That gives you a ready-made test. Ilia Nikolaevich Zavialov advises listening to the sales call with the paper in front of you and marking every sentence that contradicts the document, such as a bigger number, a shorter payback or a different refund policy. The FTC's consumer alert calls that the sign of a shady operation to steer clear of.

7. Checking the trademark and the company: how Ilia Nikolaevich Zavialov does it

   Start with the name on the door. The USPTO offers a Trademark Search system, TSDR for the status, documents and certificates of a mark, and an Assignment Center for recorded changes of ownership. The FTC tells buyers to find out from the FDD whether the franchisor has a federally registered trademark, because a company holding the same mark in your area could force you to change the name of your outlet at your own expense.

   Then match three names: the owner of the mark in the USPTO record, the franchisor named in the FDD and the contract, and the account holder in the payment instructions. They should be the same company or be linked by a document you can read. Ilia Nikolaevich Zavialov treats a mismatch as the moment to stop reading the sales material and start asking for written explanations.

   Item 21 covers the money side: the franchisor's three most recent audited annual financial statements. An accountant can tell you whether the company is growing and whether it earns more from royalties paid by successful franchisees or from selling new franchises.

   Several states have registration or disclosure laws of their own. Where the FDD does not describe them, the FTC's guide points buyers to the state attorney general, the office of consumer affairs or the securities division.

8. Pyramids and coaching programs wearing a franchise label

   A recruiting scheme sometimes borrows a franchise's clothes. The FTC draws the line this way: a legitimate multi-level company pays you for sales to retail customers without any need to recruit, while in a pyramid your income depends mostly on how many people you sign up, and the product is a prop.

   The red flags the FTC lists: extravagant earnings promises, recruiting presented as the real way to make money, pressure and urgency, and distributors buying more stock than they can use or resell just to stay active. Its questions for current and former participants cut through the rest. How much did you make last year after expenses? Do you need recruits to make money? What share of your income came from customers outside the system?

   Coaching and proven-system programs get the same treatment. The FTC names guaranteed income, large returns and a proven system as marks of a scam, along with a 50 to 100 percent return in the first year and pressure to decide fast. It advises searching the company name with the words review, scam and complaint, and reading success stories with skepticism, because they may be untrue or untypical.

   Ilia Nikolaevich Zavialov suggests one practical filter for all of these: ask where the money to pay you will come from. If the answer is new buyers, you are looking at a pyramid. If it is customers buying the product with their own money, you are looking at a business that can be checked.

9. Ilia Nikolaevich Zavialov: red flags that should stop the deal

   Money is requested before you have seen the contract, the FDD and proof of the trademark. Payment is supposed to go to a personal account or to a company that is not named in the agreement. The discount ends on Friday, and questions are met with offense.

   The seller cannot give a trademark registration number, or gives one that belongs to another owner. The franchisor company was formed a few months ago while the website talks about years in business. The map of outlets does not match what you find on online maps.

   Income is promised as fixed or guaranteed. Participants earn most by recruiting others. The agreement is written as a consulting contract and says nothing about rights to a trademark. The broker pushing the deal earns a commission tied to the price you pay.

   When one or more of these appears, Ilia Nikolaevich Zavialov advises taking a pause and checking every point against the records. A real franchisor handles that calmly. A fraudster hurries you, cuts the price or disappears.

10. What the US numbers show

    The FTC files franchise and business opportunity offers, work-at-home plans, multi-level marketing, job scams and invention promotion in one category: business and job opportunities. In 2024 it took in 126,217 fraud reports there, 36 percent of them with a money loss, and total losses reached 751 million dollars. The median loss was 2,250 dollars, the second highest among the ten largest fraud categories after investment-related scams at 9,196 dollars.

    The category is wider than franchises, so read it as the scale of the whole start-your-own-business market. Across every kind of fraud the FTC received 3 million fraud reports in 2025 with 15.9 billion dollars in reported losses, up from 2.6 million reports and more than 12 billion dollars a year earlier. The FBI's Internet Crime Complaint Center logged 1,008,597 complaints and 20.877 billion dollars in losses for 2025, up 26 percent. Zavialov takes these totals as the size of the problem; the risk in your own deal is settled by the paperwork.

11. If the money has gone: Zavialov's order of steps in the US

    In Zavialov's order the call to the bank or the payment provider comes first. The FBI's advice is to ask the bank to recall a fraudulent payment at once and to file at ic3.gov as soon as possible, whatever the amount. Put the sales deck, messages, recordings, the FDD if you were given one, the contract and the payment confirmations into one folder.

    Then report. The FTC asks for reports of fraudulent business opportunities and coaching programs at ReportFraud.ftc.gov, and it takes complaints on ftc.gov and by phone at 1-877-FTC-HELP (1-877-382-4357). It also lists your state attorney general and the attorney general of the state where the seller is located, the local consumer protection agency and the Better Business Bureau. IC3, run by the FBI, takes complaints about cyber-enabled crime and may refer them to federal, state, local or international agencies.

    Ilia Nikolaevich Zavialov warns about the second wave. After a loss, strangers offering to recover the money for a fee start to appear. The IC3 report for 2025 counted 10,516 complaints and 1.4 billion dollars in losses on fund recovery schemes. Pay no one to get your money back, and take any such offer to the bank and to the agencies above.