I Already Signed my Franchise Agreement a Few Weeks Ago, Why Would I want an FDD Legal Review Now?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Tuesday, October 23, 2016
Actually this is not uncommon. Many Franchisees already well into their franchise term and did not have any Legal Review, and issues or problems exist, end up having to hire an attorney to do what would be a similar FDD review when there are issues that need to be worked out. Only at that point there are well more items to review and try to negotiate through a solution. Having a Legal FDD review even after signing the Franchise Agreement, AND before there are problems or legal issues, gives the Franchisee some perspective as to what he should have taken into consideration, and to keep these cautions in mind for any future negotiations.
I had a client who signed onto a multiunit Franchise Agreement and came to me not to long after before even opening a single location, because he didn’t get a legal review prior, and started to feel uncomfortable with certain aspects, and felt he may have missed something important. Even though he already signed, he wanted the legal Review and I did the similar thorough and pragmatic legal review and comments, as if he hadn’t signed. Most of my report contained things I would have recommended he work with the Franchisor to change or more things.
Actually he was grateful for all the advice and recommendations and concerning items I brought to his attention, and was quite thankful he did obtain this legal review. The insight he now has to various elements may cause him to make different decisions on certain areas, such as locations, staffing, and the potential need for additional entity formations. In addition, in the event there is an opportunity to negotiate something perhaps unrelated with the Franchisor, (such as the Franchisor did not timely perform some obligation), he is armed with additional negotiating points down the line.
This particular client has bought franchises before and was versed in business already. But the truth is, he was not versed in THIS business or THIS Franchise Agreement terms.
Not all Franchise Agreements and systems are the same. Even though their FDDs generally look similar, in some, there are unreasonable terms hidden among the normal looking terms. And it’s not really about the Franchise Agreement terms so much is it is about the Franchisor itself-that is the most important-how experienced the Franchisor staff are, how involved they are with your support, how detailed the training is, etc. Basically how well is THEIR system THEY are selling to YOU, not to them. The Franchise Agreement can be favorable to the Franchisee, but if the Franchisor does not have a good program, model, system or support, those are the things you need to get familiar with. Ideally this is researched before you buy, but researched in any event, so you can know where you need to make up for the Franchisor’s deficiency in any of the areas you expected full support, or find out areas that take more of your resources than expected.
Item 7 is the table of initial investment. I routinely advise prospective clients they better have more than even the high-end range in available capital. Things ALWAYS occur that cause delays, which usually results in more costs. This item alone is where I caution the prospective franchisee to be careful in not relying on a smaller number to get you where you want to be. In this client’s case, because he committed to multiple units, the needed capital needs to be multiplied. At least to have the capital available.
A legal Review of an FDD, even after you sign the Franchise Agreement, can only put you in more control over the information you need to know, before a problem starts.