NLIPW Patents Law Volume 2 Number 12
(Contents of Franchise Disclosure Documents)
January 14, 2015
A few weeks before a potential franchisee signs a franchise agreement, he will receive a Franchise Disclosure Document (FDD) drafted by lawyers on behalf of the franchisor. The FDD is different from the franchise agreement as it is presented prior to the signing of the agreement and gives the potential franchisee the opportunity to review detailed information about the franchise.
Not only is it crucial for the potential franchisee to thoughtfully study and research the franchise opportunity, it is important for him to carefully read and understand the FDD before signing or investing any money. Below are some of the contents of a typical FDD:
1. Information relating to the franchisor, its subsidiaries and directors.
The FDD will include an overview of the Franchisor’s history and ownership. Information provided will specify the length of time the franchisor has been involved in the type of business offered and that the business format being offered has been tested over an extended period of time in specific territories.
2. Full details of criminal or civil proceedings against the franchisor, directors and arbitration awards.
The FDD will provide detailed information about any litigation involving the franchisor and its directors. Any felony or fraud convictions of the franchisor’s top executive officers should be disclosed in the FDD. The FDD should also contain information on whether the Franchisor has taken legal action against entities infringing on its trademarks or against franchisees not in compliance with quality standards. It is always a good idea to be cautious especially in cases were there are multiple lawsuits filed by franchisees alleging fraud or misrepresentation on the part of the franchisor.
3. Trademarks, copyrights, patents and the right to use other intellectual property.
The FDD should provide details of the trademarks, trade secrets, patents, copyright and design registrations the franchisor has obtained and which are necessary for the successful operation of the franchise. It is important to pay close attention to trademarks that are not registered.
4. Bankruptcy, or if the franchisor has been placed in administration, or has given any court-enforceable undertakings.
Although your due diligence should have disclosed whether the franchisor is in bankruptcy, the FDD must fully state whether any officer or director has a personal bankruptcy.
5. Franchise Fees, Start-up costs, Royalties
These expenses vary from franchisor to franchisor. The FDD provides a standardized way for you to compare the initial investment and ongoing fees required from one franchise to another.
6. Restrictions on what the franchisee may sell and details on the supply of goods and services by the franchisor or its associates to the franchisee.
Many franchisors pay close attention to the products and services franchisees utilize in order to ensure that they meet certain standards. As a result, franchisors may sell products to franchisees or they may insist on the use of designated suppliers. If a franchisor is offering products that are too limited, it may be something to consider in determining whether or not the franchise will be a perfect fit.
7. Franchisee’s other obligations and prohibitions.
The FDD will include a list of the franchisee’s contractual obligations, with cross-references to the franchise agreement. It is important for descriptions in the FDD to be consistent with those in the franchise agreement itself.
8. Audited financial statements and summary of the financing requirements.
A potential franchisee, through an accountant, must examine the audited financial statements to determine whether or not the franchisor is stable. The financial statements must show the profit-and-loss statement and the balance sheet. The FDD must also contain a summary of the financing requirement.
9. Current and ex-franchisees and their contact details.
The FDD should include a list of current and ex-franchisees. It could limit the list of ex- franchisees to a number of years. For example, the past five years. It must include their contact details and whether the franchises were bought back, terminated or sold. This information is important to enable the potential franchisee make a more informed decision.
10. Renewal, termination, transfer of the franchise agreement and Dispute resolution.
The FDD must provide information relating to the renewal, termination, transfer of the franchise agreement as well as dispute resolution. This information is important in determining the future relationship between the franchisor and potential franchisee.
This article is intended to provide general information about the subject matter. Professional legal advice should be sought about specific circumstances