When you buy a franchise, the terms of your relationship with the franchisor will primarily be governed by three documents: (i) the Franchise Disclosure Document (FDD), (ii) the Franchise Agreement and (iii) the Operations Manual. These are three very different documents that impact your rights and obligations in different ways, and having a basic understanding of each is one of the first steps toward understanding what you can expect as a franchisee.
1. The Franchise Disclosure Document
When you apply to purchase a franchise, the franchisor will provide you with a copy of its Franchise Disclosure Document. The FDD is a federally-mandated form disclosure which consists of 23 “Items” and a series of exhibits or attachments. Although the form of the FDD is established by federal regulation and there are industry standards for the information that franchisors choose to disclose, the FDD should still be heavily-customized to reflect the unique terms of your chosen franchise opportunity.
FDDs can be dense and difficult to digest. But, it is important that you take the time to understand the information disclosed (as well as the implications of any missing or “negative” disclosures). For help dissecting the FDD, you can read:
- Understanding Your Franchisor’s FDD – Part 1(Items 1 through 7)
- Understanding Your Franchisor’s FDD – Part 2(Items 8 through 14)
- Understanding Your Franchisor’s FDD – Part 3 (Items 15 through 23)
2. The Franchise Agreement
The Franchise Agreement is the contract you sign when you purchase a franchise. This is a legally-binding and typically long-term agreement that establishes everything from the duration (or “term”) of your franchise to the franchisor’s rights upon termination.
Some provisions of the Franchise Agreement will be very specific (i.e. you must pay royalties in a specific percentage by a specific day of each month), while others will be more general (i.e. you must comply with the franchisor’s brand standards as revised from time to time). In order to avoid costly surprises, it will be critical for you to have a thorough understanding of your contractual obligations – and potentially negotiate your obligations – before you sign.
3. The Operations Manual
The third key document in the franchise relationship is the Operations Manual. Unfortunately, most franchisors will not provide prospective franchisees with a copy of their Operations Manual during the due diligence process. Why is this unfortunate? The answer is simple: Your Franchise Agreement almost certainly states that it “incorporates” the terms of the Operations Manual. This means that you will be legally bound to comply with the Operations Manual to the same extent that you are bound by the terms of the Franchise Agreement. With the Operations Manual likely covering everything from trade dress to day-to-day operational standards (and being subject to revision over time), it will be important for you to glean as much information from the franchisor and its existing franchisees as possible.
Fixed-Fee Franchise Business Reviews for Prospective Franchisees
At the Goldstein Law Firm, we provide three levels of fixed-fee franchise business review services for prospective franchisees. If you are thinking about buying a franchise and would like more information about the legal risks involved, you can call (202) 293-3947 or contact us online to get started with a free consultation.
