Franchising: The Franchise Disclosure Document
All franchisors must provide a Franchise Disclosure Document to prospective franchisees at least 10 business days before any money is paid and any agreement to purchase is signed. Any company who claims exemption from this rule is NOT to be trusted under any conditions!
Question: Can the information and details in the document differ from what is actually in the franchise agreement to be signed?
The short answer is an emphatic "NO". The long, and more reliable answer requires a detailed walk-through of the proper franchise investigation process.
The Franchise Disclosure Document (FDD):
All Franchise Disclosure Documents should have as "Exhibit A" the Franchise Agreement. As a franchisor and a 25 year+ franchise consultant and developer I have encouraged clients (both Franchisees & Franchisors) to implement the following methodology to promote accuracy and to prevent misunderstanding at the very beginning stages of a possible franchise sale or purchase.
This procedure also gives the new franchisee a proper introduction to franchising. An "open-eyes" approach to buying a franchise creates a far better relationship between the franchisor and the franchisee. The following article is a bit time consuming to read, but is well worth the effort. It is divided into two parts; franchisees and franchisors.
I suggest you read it all. In the interest of brevity, I have generalized some content. Obviously there are exceptions in all issues. I will be happy to personally address any questions or comments directed to my contact form. Franchise411 Contact Form
In the meantime, read both Franchisee and Franchisor articles of various franchise systems that compare actual successes and failures. Watch out for the hype!
This includes being able to spot "PR" stories that only paint glowing reports of franchisee success, or "investigative reporting" articles or editorials that exhibit bias toward only one side of a story, or any media reports that sensationalize or inflate only one side of a issue. Very few legitimate articles or books (about franchising) are written.
Pay no attention to statistics or rating systems, even in reputable publications. Believe me, they're all tainted and very unreliable, intentionally or unintentionally! Further, all franchise organizations and associations are politically and financially motivated to endorse ONLY their own members best interests.
Pay particular attention to (stated or absent) training offered, support promised, any restrictions on territory, expansion, selling , transfer, or termination rights and increases with regard to any fees (royalties, renewals, transfers, training, assistance, continuing education, products or services).
Don't fall for the "No Royalties" line. Usually this means a set monthly fee in place of a Royalty percentage. You must pay the set fee even if you are not operating profitably. A company that receives a set fee has no motivation to assist you to whether your business is up or down! Put the FDD aside again.
Now conduct a comparison of existing competitors, both franchised and non-franchised, in your area. Spend a few days in the parking lots of businesses that will be your competitors. Or, if you are investigating a home-based service franchise, call all potential competitors in your area and actually drive by the competitors office or home (if a home based business).
Note the differences (good or bad) with the franchise system you are considering. As a side note, well meaning friends and business associates may not be familiar with the true value of a franchise system. If you are going to place value on any input, be sure that the information is based on more than opinion. Don't neglect to use library, university or internet resources.
Also, at this point call operating franchisees to ascertain their position on these issues. Be prepared to ask these franchisees what they like best about the franchise and what they would change if they could. Ask them about the competition in their area. Call and visit as many franchisees as you can. If a franchisee isn't happy or doing well, try to get all the facts. If a franchisee is happy and doing well find out why and ask his/her opinion as to why the others, if any, aren't doing as well.
Next, make a two column list of your wants and don't wants in a business. Some items to consider are:
After you compile and analyze your lists, weigh the benefits and advantages offered by the franchise system that you are considering against the disadvantages and the alternative of not owning the franchise.
If the system meets or exceeds your minimum expectations, is that enough for you? Is there another franchise system in that industry or even in an unrelated industry that does meet your business and personal objectives for the future?
A single franchise unit may not suit your income requirements. Are you financially and personally capable of purchasing and managing two or more franchise units in order to meet your required income level?
If the franchise has sparked your desire to own one, but one isn't enough to excite you financially, then a well thought out plan to acquire a multi-unit territory should be considered. Or if you want a really sophisticated franchise ownership, then an Area Development or Master Franchise Agreement may be the answer.
Now, it's time to call in the attorney or business advisor to get professional feedback. The FDD today is required to be written in plain English, not legal mumbo-jumbo. Make sure that anyone you hire to assist you is familiar with and experienced in the differences of franchise law and traditional contract or business law.
The FDD is not a negotiable document. The FDD is based on the former UNIFORM Franchise Offering Circular. The operative word is UNIFORM! The only negotiations that should even be considered are those items like territory location or extreme demographic disadvantages of a particular selected retail site that can be proven to warrant special treatment. It amazes me that some states actually are attempting to try to dictate the terms and conditions of a Franchise Agreement.
So the advisors should be engaged solely to clarify your responsibilities and obligations to the franchise system as well as those of the franchisor company to you. It is not the job of the advisor to tell you if it is a "good deal" or to make a decision for you. Don't place that responsibility on anyone but yourself!
At the "closing" or signing of the agreement, be sure that this is the document that will be used to represent the legal relationship between you and the franchisor. Photocopy it and get the Franchisor's initials on every page (just once though!). Then, if the franchisor wants to keep the original, you will have a copy with your written initials three times, and his/hers at least once.
Don't sign anything that you haven't read before and doesn't bear your initials three times. Using this format, the Franchisor cannot change the Franchise Agreement without your knowledge and permission.
Note: If by Federal Trade Commission (FTC) Regulation, other Law or the Franchisor's own policies, all Franchise Agreements are uniformly changed for all new Franchisees, then you may accept or reject the changed document, but only after you read the entire FDD (including the Franchise Agreement) again-three times!
If the changes to the Franchise Agreement are minor or truly to your advantage, and are not more restrictive, costly or imposing on your rights as a franchise owner, then you may want to proceed without beginning the whole process from the top again. If the changes are major, or negatively affect your rights, you may want to reject the purchase. Keep in mind that the changes can be a benefit if those changes help the franchisor to better control and protect the franchisee system and the public image of the system.
You must examine and review all of your franchise documents personally. Make sure that the FDD is a true representation of your franchise system and your offer to prospective franchisees. The FDD should not be written solely by your attorney. Every sentence in your FDD must be and have three distinct purposes and meet three objectives;
The success of the American franchise system has survived every painful test of time, every legal attack, every anti-free enterprise movement, every economic fluctuation, every FTC regulation, every redundant registration state regulation, every frivolous consumer litigation, every ambitious political platform, every radical movement to create a "labor-union relationship" and every attempt to create an "employee-employer" relationship (from the "franchisor-franchisee" relationship). For more details:
It takes a great FDD, professionally prepared, to attract and sell the best franchisee candidates. It takes a team effort to produce a great FDD. Along with the franchisor, the necessary "dreamteam" consists of an experienced franchise consultant, an accountant experienced in franchise accounting nuances and a seasoned franchise attorney.
All of the problems in franchisor-franchisee relationships could be greatly diminished or even eliminated if a complete generic orientation to franchising were to be provided to the prospective franchisee before the sales talk about the particular franchise is presented.
AND- if the above format is practiced and promoted by every Franchisor and Franchisee (again- before the sale) very little, if any, misinterpretations, distortions or other claims of seller/buyer abuse would occur.
This process alone would would level the playing field for franchisees and would eliminate any attempt at changes "after the fact" and "buyers (or sellers) remorse".
So in the final analysis, if the franchisor attempts to "switch" Franchise Agreements without an acceptable reason and without your full and complete agreement and if you are "singled" out, don't sign it! If you are already a franchisee and significant changes are a condition of renewal, well that's a whole other story. Watch for our upcoming article on "Franchise Renewals".
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