Why You Need Your FDD Reviewed
My Dad always told me, “Don't sign anything with your franchisor until your lawyer looks it over.” Dad was a long-time franchisee and an old-school businessman who disliked lawyers. So this contradiction got my attention for the importance of legal review. Dad believed in truly understanding what you were agreeing to, now and in the future.
Buying into a franchise system is a long-term investment with big obligations. Having an experienced franchise attorney review your initial franchise documents is an important step in evaluating the brand, system and structure of the business you will be operating and living with for years to come. Your lawyer's review should:
- Summarize the FDD and Franchise Agreement
- Detail areas of concern or importance
- Identify provisions to negotiate
- Clarify your obligations and the franchisor's
- Insure you are aware how the law may effect the Agreement
- Possibly provide you with some notes on their experience
First Euphoria, Then Facts:
Starting a new franchise business is an exhilarating, emotional (and sometimes scary) adventure. In their excitement and anticipation, many new franchisees are inclined to rush through the process, with visions of grand openings and future success dancing in their mind.
Added to the euphoria, you will be courted by the franchisor, visit operating units, participate in discovery days, speak with current and past franchisees – activities all centered around the franchisor as a cheerleader, building excitement to motivate you to enter into their system.
This is why it's important to make an informed decision. One of the biggest benefits of a thorough legal review is to ground the process in the facts (not the hype) of the business you are committing to. By neutralizing the emotion long enough for you to analyze the business particulars, your franchise attorney's review will assist and guide you based on the realities of your investment. In particular, there are a couple things to keep in mind:
- Don't be overwhelmed by the volume of material provided to you by the franchisor, but don't ignore it either.
- Don’t believe the that franchisors do not negotiate agreements, because in most cases they do.In many states, such as California, there are even franchise laws providing the right to negotiate franchise agreements.
In It to Win It:
A franchise is a long-term commitment to operate a business, which is part of a system, governed by the Franchise Agreement you sign and the operational mandates provided by the franchisor. The documents provided to you in the Franchise Disclosure Document ("FDD") specifically frame your relationship, obligations and those of the franchisor for the next 5, 10, 20 years or longer. To really understand the FDD provide you with the information to make an informed decision and understand the "family" you are entering into.
- The FDD is a plethora of information, which will allow you to begin to analyze the "business" upfront, before you devote and invest your hard earned dollars.
- The FDD should be reviewed in it's entirety, and not piecemealed.Each part of the FDD has specific disclosures which are important for you to understand.
- There are the mandatory 23 sections of disclosure in the FDD, discussing such items as who operates the franchisor, have they been involved in any lawsuits or bankruptcies, what is the initial cost to open the franchise and how is that determined, along with ongoing costs and fees to name just a few areas disclosed.
- The review of these sections provides detail that is not specifically present in the Franchise Agreement, and are designed to provide you with some of the facts you need to analyze the system and business you will be opening.
- Besides the 23 disclosure sections, the FDD houses other agreements which you may be required to sign at some point in your franchise tenure, such as the franchise agreement, territory agreements and personal guaranty’s.
These agreements will dictate your operation from the day the doors open, to the eventual sale or closing years (hopefully) down the line.
Why Use a "Franchise" Attorney:
Franchising is a unique and specific area of the law. Just as you wouldn’t go to a plastic surgeon for a heart surgery, as a franchisee, you want an attorney with experience in the intricacies of franchising and franchise law.
There are few things that may impact your life more then devoting your hard earned money and savings to a business. There is tremendous upside potential if you succeed, and potential financial distress and frustration if not. You should take the time and interest not only to be excited and dream of the future, but to be grounded and prepared for the journey.
An experienced franchise attorney will assist and counsel you through the acquisition process and beyond. Take it from my Dad: Let an experienced franchise attorney advise you; they will provide both sound advice and peace of mind.
David Scott Levaton, Esq., founder of Franchise Legal Support, has been representing franchisees and franchisee associations for nearly 30 years. David’s family has been in franchising since 1968, and he personally owned and operated a multi-unit franchise operation for 12 years, all while maintaining his law practice. He can be reached at firstname.lastname@example.org.