Franchise Due Diligence; The Franchise Agreement And The Franchise Disclosure Document

Do discussions about franchise agreements get you excited? Does the mere mention of the Franchise Disclosure Document, (FDD) make you want to run to your local franchise attorney, so you can plunk down a $1500 check for some due diligence services?

And, if those things don't excite you enough, remember that you should first do this, before you even sign your franchise agreement.

And the fun begins…..

It's really not that bad. There are lot's of details in a franchise agreement, (contract) and the FDD can be a little overwhelming for some, but if you do all the things you need to do, one chunk at a time, you'll be fine.

"But, Joel, why do I have to mess with this really boring 200 page document?"

Because you don't want to lose your money.

Proper franchise research includes going over all the things that you may not want to go over.

I want to make sure that you don't miss something. (The "something's" may include some of the more boring aspects of franchise research.)

The FDD

As a prospective business owner, you need to know what the legal issues are that could affect you, your family, and your new business.

When it comes to franchising, the Federal Trade Commission requires all franchise companies that are registered in the United States to have a document called the Franchise Disclosure Document.

This legal document must contain 23 items of information for you, the prospective buyer.

Some of the information includes:

1. The business experience and background of company officers

2. Any current or pending litigation

3. Initial Investment (broken down specifically)

4. List of all franchise owners currently in the system

5. List of all franchise owners that have left the system in the past 12 months

6. Obligations of the franchisor, and of the franchisees

These are just a few of the items that are included in the FDD.

It's recommended that you consult with an attorney that is familiar with franchise law in the United States, when you're at the point in which you are getting serious about investing in the franchise business.

* In July of 2008 a new rule took effect. It changed some aspects of the original disclosure document that was called the UFOC.

The law firm of DLA-Piper lays those changes out nicely.

The Franchise Agreement

Do you remember how hot Krispy Kreme donut shops were a few years ago? I do! A week didn't pass without at least one phone call, or one email from someone asking me, "Joel, how much would it cost to buy a Krispy Kreme donut shop?"

A few hundred thousand dollars.

Silence. Followed by, "oh."

One must sell lots of donuts. Lots.

Yummy-looking

Over at www.oncle.com there are some copies of real-live franchise agreements. Here's part of the Krispy Kreme franchise agreement.

"You agree to use in developing and operating the STORE only the
buildings, equipment (including production equipment and fixtures, cash
register/computer terminals and a telecopier) fixtures, furnishings, signs and
delivery vehicles (if utilized) that we have approved for KRISPY KREME STORES as
meeting our specifications and standards for quality, design, appearance,
function and performance. You agree to place or display at the Site (interior
and exterior) only such signs, emblems, lettering, logos and display materials
that we approve from time to time. We are the sole supplier to our franchisees
of certain doughnut production equipment and fixtures that we specify for KRISPY
KREME STORES. Such doughnut production equipment and fixtures consist of, but
are not limited to, the items described on Exhibit C. You agree to purchase all
such production equipment from us or such other suppliers that we designate from
time to time. You agree to acquire approved brands, types or models of other
equipment, fixtures, furnishings, signs and delivery vehicles only from
suppliers we have designated or approved (which may include us and/or our
subsidiary). If you purchase supplies or equipment from us, you agree to give us
authorization in the form that we designate, to initiate debit entries and/or
credit correction entries to the STORE bank operating account (the "Account")
for payment for purchases from us and any interest charges due thereon. You
agree to make the funds available in the Account for withdrawal by electronic
transfer no later than the due date for payment thereon."

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How many breaths were you able to take in between sentences?

There are pages and pages with paragraphs similiar to the one above in every franchise agreement.

I could show you more of the Krispy Kreme franchise agreement. But why? Are you an attorney?

It's not that there's anything wrong with a franchise agreement. It's not a case of a franchisor trying to pull a fast one on you. It's just that it's written in legalspeak, and it's very, very, detailed. You could miss something. Get a franchise attorney who can help you decipher things.

An attorney that's familiar with franchise law will prove to be an invaluable resource when deciding on whether or not to move forward with a franchise opportunity.

If you'd like a referral, just let me know. I'd love to help protect you.