Before you buy a franchise, the franchisor is legally required to provide you with a copy of its Franchise Disclosure Document (FDD) and franchise agreement. Federal regulations require franchisors to deliver these documents at least 14 calendar days prior to entering into a franchise relationship. This “cooling off” period is designed to give prospective franchisees sufficient time to weight their options without being pressured by the franchisor, as well as to review the FDD and franchise agreement in detail.
When reviewing the FDD, most prospective franchisees hit the highlights: the Initial Franchise Fee, the royalty rate, the estimated initial investment and maybe the description of the protected territory. Few digest the FDD in its entirety, and fewer still take the time to wade through the dense legalese of the franchise agreement.
5 Key Issues to Review in the FDD and Franchise Agreement
But, when buying a franchise, you need to gather as much information as possible, and you need to make sure you have a clear understanding of your legal rights and responsibilities. You also need to make an informed decision about negotiating certain provisions of the franchise agreement. If you overlook these provisions of the FDD and franchise agreement, among others, you may find yourself facing unexpected (and unhappy) surprises down the line:
- Franchisor Personnel Experience – Do the franchisor’s key personnel have experience running the type of business you will operate as a franchisee? Do they also have significant experience working for franchisors? Both of these are important, as you need to be able to rely on the franchisor’s personnel to provide operational support while also managing the franchise system effectively. Look to Item 2 of the FDD for answers.
- Litigation and Bankruptcy – Does the franchisor have a history of litigating with its franchisees? Has it recently filed for bankruptcy? As a prospective franchisee, these are important facts for you to know, and you can find the answers in Items 3 and 4 of the FDD.
- Other Fees – You are probably aware that most franchisors require payment of an Initial Franchise Fee, a royalty and an advertising fund contribution. But, are you aware of the other costs of franchise ownership? Item 6 of the FDD, labeled “Other Fees,” should disclose all other fees you will be required to pay to the franchisor or its affiliates.
- Supplier, Product and Service Restrictions – Will you be required to purchase supplies or products from designated suppliers? Will you be required to buy certain products or offer certain services regardless of whether they are profitable for your franchise? These questions should be answered in Item 16 of the FDD.
- Post–Termination Non-Competition – When the franchise relationship ends, what will you be able to do with your skillset and experience? Any post-termination non-competition restrictions should be summarized in Item 17 of the FDD and described fully in the franchise agreement.
Get Help Reviewing the FDD and Franchise Agreement
Our firm provides four tiers of fixed-fee franchise business review services to prospective franchisees nationwide. To get help reviewing your FDD and franchise agreement from franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or inquire online today.