Questions You Should Ask Your Franchise Attorney
By Lane Fisher
If you are considering purchasing a franchise, there are a few initial questions you should ask your franchise attorney before you make the initial investment. The list below includes several important topics to discuss, including questioning the registration process, the FDD itself, and industry-specific issues.
Was properly disclosed with a legally compliant FDD?
The FTC Rule requires franchisors to disclose certain aspects of their business and business experience in a 23-item document – the Franchise Disclosure Document (often referred to as an “FDD”) and to wait fourteen calendar days before taking money from you or signing a franchise agreement.
Was the FDD registered with the state on the day you were provided with it?
Many states require franchisors to register their FDDs before offering or selling them to prospects.
Was the FDD I was given properly updated?
The FTC requires franchisors to amend their FDD annually, within 120 days of their fiscal year. A typical fiscal year ends on December 31, meaning the deadline for renewal would be April 30. If you were given an FDD in March, it might be wise to wait until the annual renewal version in April before you move forward.
Who else has information about the franchisor?
All FDDs are required to include contact information of current and former franchisees. Existing franchisees know the ins and outs of the business and how the franchisor treated them and can give a fresh perspective on the franchise system.
How much is this going to cost me?
Ask your franchise attorney to go over the initial fees, other fees, and the estimated initial investment – each of which has their own item in the FDD.
How much money will I make?
While not required, a franchisor may choose to include financial performance information in its FDD and may do so as long as there is a reasonable basis for the information. Providing financial performance information that is not included in the FDD (except for a few limited exceptions) is a big red flag and you should ask your franchise attorney about the consequences of these actions, which are likely forbidden by the FTC.
Does the franchisor and/or its officers have a lengthy litigation and bankruptcy history?
The FTC Rule requires franchisors to disclose certain litigation that is relevant to the franchise process as well as bankruptcy information involving the franchisor company and its management.
Does the franchisor make money from franchisees in other ways?
Franchisors often collect money indirectly from you (via rebate arrangements with vendors off of purchases you make) and also directly from you (via the franchisor or its affiliates selling products or services directly to franchisees).
Does the franchisor have a registered trademark associated with the system?
Since the trademark will be such a large part of your business (and will be licensed to you), it is important to understand everything about it, including if there are infringers, if it is registered and if all affidavits have been filed.
What are the relevant industry laws and are they disclosed in the FDD?
It is important to independently investigate any industry-specific laws, so that you understand any restrictions they may impose on your business.
What are the competitors doing?
By looking at competitors FDDs (which are public information and available online) you can get a picture of the types of fees and costs other similar franchisors are imposing on their franchisees as well as other obligations required of franchisees in a similar industry.