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Buying a Franchise? You Need to Make Sure You Are Making an Informed Decision
Buying a franchise is much more than just a simple purchase. Whether you plan for this to be a short-term or long term investment, becoming a franchisee carries a host of financial risks and legal implications. As a result, prospective franchisees need to make informed buying decisions, and this starts with hiring an experienced attorney to review and analyze the Franchise Disclosure Document (FDD).
Founding attorney Kit Higgs brings well over a decade of relevant experience to advising prospective franchisees. As a former in-house general counsel for a 200-plus unit franchisor, he understands the buying process from both perspectives, and he has an intimate understanding of what should—and shouldn’t—be in an FDD. Today, he relies on these insights to help prospective franchisees understand the risks they are facing, and to help prospective franchisees identify potential issues they are not likely to identify on their own.
Examples of Key Issues in the FDD for Prospective Franchisees
Franchise Disclosure Documents are long and complex documents that are subject to requirements imposed by the U.S. Federal Trade Commission (FTC) and various state regulators. There are numerous issues to consider; and, in many cases, information that is conspicuously absent from an FDD can be just as telling as the information an FDD actually contains.
While there are far too many potential issues to list them all, some examples of key issues in the FDD for prospective franchisees include:
- Bankruptcy and Litigation History (Item 3 and 4) – Is the franchisor in bankruptcy (or has it recently come out of bankruptcy)? Does it have a history of litigating with its franchisees?
- Initial and Ongoing Costs (Item 5, 6 and 7) – What are the costs you will incur to open your franchise? Are the franchisor’s initial investment estimates reasonable? Are its initial and ongoing fees in line with industry standards?
- Franchisor Support (Item 11) – What support can you expect to receive as a franchisee-both before and after you open for business?
- Trademark Registration (Item 13)– Are the franchisor’s trademarks registered with the U.S. Patent and Trademark Office (USPTO)? Or, is there a risk that another company could claim priority rights?
- Financial Performance Representation (FPR) (Item 19) – Does the franchisor provide an FPR? If so, what does it say, and what exceptions and disclaimers apply?
- System Status and Projected Openings (Item 20)– How healthy is the franchise system? Is it growing? Is the franchisor on pace to meet its opening projections for the current year?
- Federal and State Compliance – Does the franchisor’s FDD comply with the FTC’s Amended Rule? If you are in a franchise registration or disclosure state, does it comply with your state’s requirements?
Again, these are just examples. Although every FDD must contain the same 23 Items every franchisor’s FDD is unique, and identifying the risks presented by a particular franchise opportunity requires an in-depth review of the franchisor’s disclosure document (as well as various other sources of information). If you are considering a franchise, we encourage you to contact Kit for more information.
Contact Kit About Your Franchise Opportunity
Are you thinking about buying a franchise? If so, Kit can help you make an informed buying decision. To inquire about Kit’s FDD review and analysis services, please call 513-223-3125 or tell us how Kit can help online today.