How Can I Compare My Franchise Agreement to Prior Versions From the Franchisor Before Purchasing a Franchise?
You are a prospective Franchisee and were given a Franchise Disclosure Document, (FDD) which contains the Franchise Agreement you are being asked to sign. The Franchise network has several (or many) franchisees already, and you are wondering if all the prior franchisees have the same version of the documents, or are they paying perhaps a lower royalty rate and other lower fees. Is there a way to find out what terms my prospective Franchisor changes in the Franchise Agreement from prior versions?
In California, for the most part, the answer is YES. Here’s how.
Apart from asking the Franchisor this direct question (hoping for a very detailed and accurate answer which you will likely not receive), there is a way to independently see literally each and every change in the FDD (including the Franchise Agreement terms), from the prior years versions.
Franchisors, which intend to sell franchises located in California, must register to sell franchises with the State, and each year Franchisors must renew this registration. The registration renewal requirements include, among other things, the FDD containing all the changes from the prior years’ version. Thus, Franchisors submit a “redlined” version so it is easy to see what was added (underlined language) and what was deleted (language with a strike-through like this).
Here’s the great part:
All of the Franchisor’s renewal application documentation, including this Redlined FDD are literally listed on the California state website for franchise registration, for each year.* Anyone can look up a Franchisor’s history of registrations, renewals, and all FDD redlined versions submitted from year to year and see what was changed from prior year.
As an experienced franchise attorney, this research is part of what I do as when a prospective franchisee hires me to review the Franchisor’s FDD in anticipation of purchasing a franchise. This research will give the prospective franchisee well more insight to the Franchisor’s system and what changes the Franchisor made, either out of necessity to fix unworkable parts of its system, or to simply raise fees and add more franchisee obligations.
A Prospective franchisee might think, “is it legal that I am being charged more that the prior franchisees?”-“how can I compete?” –The brutal truth is, yes it is legal, so long as the Franchisor has properly amended/renewed its FDD (including the Franchiser Agreement) and properly registered the revised FDD prior to giving it to you.
Knowing that you will be paying more or higher fees than all your other fellow franchisees may have an important impact on your decision whether or not to purchase this franchise. And might possible give a prospective franchisee an opportunity to negotiate better terms with the Franchisor.
If you are shopping for franchises, you also need to be shopping for franchise attorneys who will review your FDD and give you a thorough and informative legal review and advice.
*there is an exception for very large and experienced franchisors (having $5 million net worth and 25 locations over 5 prior years), from being required to submit their FDDs to the State of California, if they qualify for the exemption.