Date: May 18, 2016

As a prospective franchisee, and pursuant to the Federal Trade Commission Franchise Rules and various state registration rules, you will receive a Franchise Disclosure Document (FDD). An FDD outlines various details about the franchisor and its operations, provides a description of what will be involved for you as a franchisee, and includes copies of the operative agreements – a Franchise Agreement. You are strongly recommended to review the entire FDD, including all of the attachments. This may seem like a very laborious process, but you will eventually be entering into a long-term contract requiring you to make significant monetary investments and it would behoove you to know as much about your franchisor as possible before entering into a long-term, contractually binding arrangement.  

In addition to reviewing the FDD, you are also strongly recommended to do your own due diligence in terms of finding out as much as possible about the franchisor and its existing and former (if any) franchisees. The FDD provides you with various forms of information concerning the franchisor, along with a list of current and former franchisees with their last known contact information. The information that a prospective franchisee can obtain from former and existing franchisees is invaluable. In contacting existing or former franchisees, one should contact as many and as soon as possible and from all different parts of the country (assuming it is a national franchise system) to get a feel for how the system operates, whether or not it is something that the franchisees are satisfied with, and what issues, if any, may exist within the system. You may actually obtain the best information from those that have left the system.  

In addition to speaking with current and former franchisees, you should make it a point to speak with the franchisor’s management team and also visit the franchisor to get a sense of its operations. Many franchisors conduct what is referred to as “Discovery Days,” in which the franchisor has prospective franchisees come to the franchisor’s headquarters or a corporate unit to introduce the prospective franchisees on a personal (usually group) basis. Even if you do attend a Discovery Day, it does not hurt to also individually visit the franchisor’s main office with its management team. Further, given today’s wealth of online information, a simple internet search can provide you with a wealth of knowledge. However, just because it is on the internet does not mean it is true.

Once you have decided that a particular franchise system interests you, the next step would be to have the FDD, Franchise Agreement and related agreements reviewed by franchise counsel. Reger Rizzo & Darnall’s Franchise & Distribution Practice Group does this on a routine basis and provides a comprehensive analysis of the FDD and Franchise Agreement, along with potential negotiations of the Franchise Agreement, structuring of the business entity, real estate and/or lease review and negotiations, and other related matters in order to assist the prospective franchisee with its new franchise venture.

Most people will tell you that a franchisor will not negotiate its Franchise Agreement.  Sometimes this is true and other times it is not. Regardless, it is recommended that you have a franchise lawyer review the FDD and Franchise Agreement so that you can make an informed decision knowing what the legalese means and what that would mean for you, not only at the beginning of the relationship, but during and sometimes even more importantly, at the end of the relationship. There is no requirement for a franchisor to negotiate a Franchise Agreement and sometimes it is hit or miss as to whether or not they will negotiate, even if they negotiated other agreements within the system.

A franchisor and its counsel spend considerable time and money preparing an FDD, including the Franchise Agreement and related documents to offer prospective franchisees. These agreements are drafted to develop and maintain a successful brand and system. The importance of consistency across the system should not be discounted, and this consistency benefits both sides.  

If negotiations occur, it can result in a Franchise Agreement that is better suited to the individual franchise relationship than the form franchise contract contained in the FDD. No matter how extensive the negotiations might be, keep in mind that, based on the nature of the franchise relationship, the agreement will still be in the franchisor’s favor when considering the relative obligations of the parties, the remedies available to them, and the need for franchisor controls to protect the system.

Because of this imbalance, negotiating a Franchise Agreement is very different than negotiating a typical business contract between two parties with comparable leverage. Equality is unrealistic in Franchise Agreements. The very exercise of requesting changes to the agreement and having a robust discussion about the parties’ interests and concerns brings greater clarity to and understanding of the parties’ expectations. Franchisee’s counsel may find that, in the course of dissecting the Franchise Agreement and consulting with the client about the meaning of the Franchise Agreement’s written terms, the written agreement is contrary to the prospective franchisee’s expectations and understanding of the deal, or of franchising generally. Franchisee counsel will have done a service by advising the franchisee as to the true and complete nature of the franchise relationship in light of the written terms of the agreement.

For questions, comments or additional information, please contact Harris Chernow, Chair of our Franchise & Distribution Practice Group.