Joel Libava
You’ve whittled your franchise search down to two concepts.
They’re both terrific franchise opportunities.
They both cost about the same to buy.
The franchise sales reps are both nice. They’re both professional, too.
You took my advice and are involving your family members early in the process-and they’re good with your franchise choices.
You’re almost done with your research. You just have to go over the Franchise Disclosure Document. (FDD)
You have it your hot little hands, right? And, you know about the earnings claims that may be contained in it, correct?
Fantastic.
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Franchise Advice: Count The Number of Lawsuits Against The Franchisor
The FDD has a specific section on litigation…on franchise lawsuits. You knew that, right?
From Josh Brown and Stephanie Maris:
“When reviewing the FDD, if there are any lawsuits listed in Item 3, it is important to look into the suits to determine the circumstances and the ‘who, what, when, where, and why’ of the case, so to speak. You should be cautious of any litigation involving the franchisor as a defendant because it could be a signal of larger issues with the franchisor’s system or operations.”
The team at Indy Franchise Law continues…
“The franchisor only has to disclose its involvement in certain types of legal actions within the last ten years from the issuance date of the FDD. Also, the franchisor only has to disclose material franchisor-initiated lawsuits against franchisees that have been filed over the course of the last fiscal year. Therefore, even if there are no suits listed in Item 3, you should ask the franchisor whether it has been involved in any litigation over the course of the franchise and whether the franchisor has ever initiated a lawsuit against any of its franchisees and the reasons why.”
That information is pretty important to know about. If you’re deciding between a couple of different franchise opportunities, lawsuits-or the absence of them, may be a deciding factor in which opportunity you go for.
Remember, even if no lawsuits are disclosed in the FDD, you still need to ask the franchise sales rep or the CEO if there is any pending litigation that’s not listed in the FDD.
Franchise lawsuits happen for a variety of reasons. Don’t get yourself into a tizzy just because I brought this topic up as one (an important one) to investigate as part of your franchise research. Just know that franchisors occasionally get sued by franchisees, vendors, suppliers…and franchisees occasionally get sued by vendors and by franchisors. Lawsuits are part of any type of business. As a matter of fact, lots of independent businesses are involved in litigation, too.
It’s All In There
Almost everything you need to know about the franchisor you’re thinking of partnering with will be contained in the FDD. A drab, boring, and extremely long, wordy legal document.
I’m kidding. The FDD truly is an exciting 350-page document to read through.
