An FDD Review & Consultation is a Bargain
Posted Thu, 2014-01-09 20:47 by Howard Bundy
We spend a lot of time counseling clients who invested in an unsuccessful franchise without ever consulting an attorney. Most of these clients invested hundreds of thousands of dollars and poured years of effort into a franchise that not only never performed as expected but may not have generated any profit. Upon reviewing the FDD and the franchise agreement, it becomes very clear that there was very little chance that the franchise would ever succeed and our clients never should have invested. Had the clients only spent less than two thousand dollars for a competent FDD review they might have saved themselves hundreds of thousands of dollars in damages. A thorough FDD review is not a luxury expense but rather an essential element of the franchise selection process. Here are the three things every prospective franchisee should know about FDD reviews.
Your attorney should be a doomsayer: By the time a prospective franchisee contacts our firm they have developed a personal relationship with the franchise salesperson and are excited to invest. They are filled with expectations of a long, successful and cooperative franchise relationship. They may have met other franchisees and are optimistic about joining their ranks. They are focused on how their lives will look if things go right with the franchise. It’s our job to describe how their life will look if things go wrong by showing them how specific elements of the franchise agreement will work. If a prospective franchisee tells us they are sure they will make a solid income working in their franchise, we force them to carefully go over the costs of the initial investment, the amount they will be paying in royalties and likely operating cost. We talk about what it means to “break even”. If a prospective franchisee believes they will succeed because the franchisor will support them every step of the way, we point out the section of the FDD where the franchisor lists the finite amounts of support they are agreeing to provide and the amount they will charge for any “additional” support. We tell them that when the franchise agreement states that any other support is “discretionary” they should assume that they will never receive it. If a prospective franchisee says they would like to pass the business on to their children, we point out the strict limitations and prohibitive costs of transferring the franchise. Our job is to help our clients carefully think through the universe of possible outcomes. In decades of advising franchisees after they invested no one has ever said they wish they hadn’t thought of worst case scenarios before they decided to invest. Most say they wish someone had told them—but, with embarassment admit they never consulted a franchisee lawyer.
A quality franchise review can be expensive (but you get what you pay for): From what our clients tell us, franchise brokers still inform prospective franchisees that a good franchise review shouldn’t cost more “than a couple hundred bucks.” This might have been true forty years ago but considering that a good FDD review will involve an experienced franchise attorney spending a few hours reviewing the documents and then a few more hours going over those documents with you should expect to spend between $1,200-2,500 (or more under some circumstances). Skipping—or worse going with a bargain basement FDD review—is a “savings” that can come around to bite you. Prospective franchisees who cannot afford the expense of a thorough FDD review should take a hard look at whether they can afford the investment at all.
Hiring a franchise attorney is the start of relationship: Every small business owner, including every franchisee should have a trusted attorney in their contacts list. The best time to find an attorney you can work with is before you need to work with an attorney. Think of the FDD review as a first date with your business attorney. Is he or she someone you can work with? Do they communicate well? Are they responsive? Do you feel like to you talk openly with them? Most importantly, are they a person with a depth of experience in representing franchisees? Hopefully you will walk away with an excellent FDD review (and some tough questions to ask your franchisor) and an attorney you feel comfortable calling at the first sign of trouble.