I’m an Experienced Franchisee and Business Owner Why Do I Need to Have My FDD Reviewed by a Franchise Attorney?
In a word, YES. Even if you are an experienced business owner and even if you have owned a franchise business before; having an experienced franchise attorney review a new FDD with a new franchise agreement and related documents you are about to sign, is critical. Why? Not all Franchise Agreements are alike, and even though all FDDs look similar, the fact is, Franchisors change and revise these documents every year and add new and more burdensome obligations and additional reservations of rights. AND these reservations of rights are in the beginning disclosure area, (Items 1-22) NOT in the Franchise Agreement.
It’s this beginning Disclosure area, which contain all the things the Franchisor may do in the future—and will. I have seen FDDs that basically reserve the right to change every aspect of a franchise model, including names, and fees and reserve the right to implement anything new they want with any fee they want and you are obligated to comply with no negotiation or argument once implemented.
None of this will be in the Franchise Agreement. Having an attorney review only your Franchise Agreement, is probably a waste of your attorneys fees paid, as the most critical red flag are not necessarily in the Franchise Agreement but in the Disclosures. Without reviewing the full FDD including its exhibits you will not get the real legal advise you need, which is the problems that may come in in the future.
In addition, Franchisors who sell franchises in California, must have an approved application to sell franchises, on file with the California Department of Business Oversight. As part of that application, the Franchisor must include the FDD, which had been redlined to show the changes from the prior years application. As an experienced California Franchise attorney I always review the state filings to determine a) if the Franchisor is properly registered (you would be surprised how many mess this up), and b) to make sure the Franchisor gave you the correct version of the FDD (again, a lot of Franchisor mess ups), and c) to see what the major changes are from the year prior, which gives me a good idea what the additional obligations will be for YOU that all prior franchisees do not have, thus putting you at a bigger disadvantage. In addition, it is not uncommon for Franchisors to give you financial information such as store revenues, or P & L’s or prospective P & L information, which is completely illegal unless such information is identically stated in Item 19 of the FDD. And even if there is Item 19 information, it must viewed for what it is, a marketing tool, not an assessment of what your will achieve. Sales information can be skewed many ways to look better than reality. And not all the franchise units can be comparable in terms of size, service offerings, location, etc.
There are many other reasons to have a California Franchise Attorney review your FDD. Franchisors are oftentimes willing to work with you on certain obligations. My reviews routinely point out provisions I recommend asking the Franchisor to work with you on, and many will. My report is also a very pragmatic look at the franchise industry, competition, issues with locations, the specific franchise concept and the franchisor in general, pointing out potential issues and problems I can glean from my 30 years experience.
Purchasing a franchise business can be a long term, expensive investment, particularly if your chosen concept requires a brick and mortar location with a long lease commitment. You do not have the right to change your mind, or try to back out once you sign and pay your upfront fees. Having the information of the most concerning potential issues going in will at least arm you with the information of what you might expect and to be prepared.
The time to have a Franchise Attorney review your FDD, is before you sign your franchise agreement.