Find Out What You Need to Know from an Experienced FDD Review Lawyer
If you are interested in a franchise opportunity and the franchisor considers you to be a viable candidate, it will provide you with a copy of its Franchise Disclosure Document (FDD). As a franchisee, taking the time to carefully read the FDD is important, but it is also important to hire a lawyer to conduct an FDD review.
A (Very) Brief Introduction to the FDD
All franchisors must have an FDD. This is a requirement under the FTC Franchise Rule, and many states have adopted franchise disclosure laws that require franchisors to provide candidates with an FDD as well. Under the FTC Franchise Rule, an FDD must consist of a cover page, a table of contents, and 23 “Items,” each of which must contain certain specific pieces of information:
Item 1: The Franchisor
Item 1 contains information about the franchisor, its predecessors and affiliates. This information can be useful for learning about the franchisor’s history, affiliated suppliers and various other factors that could be pertinent to your decision-making.
Item 2: Business Experience
Item 2 contains information about the franchisor’s management team. Unless the franchisor just started franchising, you will generally want to see that its leaders have experience both within the business and within franchising.
Item 3: Litigation
If the franchisor is currently in litigation or has previously been in litigation that is relevant to the franchise offering (i.e., litigation with its franchisees), this should be disclosed in Item 3. An experienced FDD review lawyer will be able to help you assess the implications of any litigation disclosures.
Item 4: Bankruptcy
Item 4 should include information about any pertinent bankruptcy proceedings. This includes not only the franchisor’s Chapter 7 and Chapter 11 filings (if any) but also those of its owners, managers and predecessors.
Item 5: Initial Fees
The initial franchise fee should be clearly stated in Item 5. This Item of the FDD should also disclose any other up-front or one-time fees you will have to pay in order to move forward with pursuing the franchise opportunity.
Item 6: Other Fees
Item 6 should disclose several fees. These include the royalty fee, advertising fund fee, and renewal and transfer fees, among others. During your FDD review, your lawyer will be able to explain whether the franchisor’s fees are in line with industry standards.
Item 7: Estimated Initial Investment
Item 7 should provide a reasonably accurate estimate of the total cost of opening for business. This includes purchases of all necessary items and services (including the cost of hiring an FDD review lawyer), as well as an initial capital reserve.
Item 8: Restrictions on Sources of Products and Services
If the franchisor restricts the sources of any products or services you will need as a franchisee, this should be disclosed in Item 8. Purchasing restrictions can often have significant implications for franchisees, so this is often a key area of concern during an FDD review.
Item 9: Franchisee’s Obligations
Item 9 should provide a summary of your primary obligations under the franchise agreement. However, reviewing Item 9 is not a substitute for reviewing the franchise agreement—and you will most likely want to have your FDD review lawyer review the franchise agreement as well.
Item 10: Financing
If the franchisor offers any in-house financing options, these should be disclosed in Item 10. This is relatively uncommon, and, even if your franchisor offers in-house financing, you will most likely have better options available.
Item 11: Franchisor’s Assistance, Advertising Computer Systems and Training
Item 11 is typically one of the lengthier Items in the FDD, and this also makes it a key focus area during an FDD review. Generally speaking, everything the franchisor promises to offer in Item 11 should also be addressed in the franchise agreement.
Item 12: Territory
Item 12 will disclose whether you will receive a territory as a franchisee; and, if so, whether your territory is exclusive, protected or unprotected. Even “exclusive” territory rights will often be subject to exceptions, so this is a key Item to discuss with your FDD review lawyer.
Item 13: Trademarks
Item 13 should list the franchisor’s trademarks and their registration status. The trademark, or brand, is a core aspect of any contemporary franchise offering; and, if the franchisor’s principal trademark isn’t registered, you will want to discuss this with your FDD review lawyer as well.
Item 14: Patents, Copyrights and Proprietary Information
Item 14 should contain information about the franchisor’s other intellectual property (IP) assets. These disclosures are typically fairly minimal, as most franchisors do not have registered patents or copyrights to disclose in their FDDs.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Item 15 should state whether you will be obligated to operate your franchise day to day. If you are not interested in having direct involvement, this will be a key Item to review.
Item 16: Restrictions on What the Franchisee May Sell
Item 16 should list any restrictions on what you will be allowed to sell. However, franchisors often reserve broad rights to make changes to these lists over time.
Item 17: Renewal, Termination, Transfer and Dispute Resolution
Item 17 should provide a brief summary of key provisions in the franchise agreement. Here too, reviewing this Item is not a substitute for reviewing the franchise agreement itself.
Item 18: Public Figures
If the franchisor employs any public figures for promotional purposes, this should be disclosed in Item 18. Most franchisors do not have anything to disclose.
Item 19: Financial Performance Representations
If the franchisor makes any financial performance representations (FPRs), it must put them in Item 19 of the FDD. If the FDD you receive contains an FPR, this will also be a key focus during your FDD review.
Item 20: Outlets and Franchisee Information
Item 20 should contain several tables that list the franchisor’s current, pending and former franchised outlets. The information in these tables can be extremely valuable. The franchisor must also identify its current and former franchisees, though this information is typically in an appendix to the FDD.
Item 21: Financial Statements
Franchisors must disclose their recent financial statements in Item 21 of the FDD. These financial statements must be audited unless the franchisor is new to franchising.
Item 22: Contracts
Item 22 should list all contracts you will be required to sign. Along with the franchise agreement, some franchisors require franchisees to sign other contracts as well.
Item 23: Receipts
Item 23 should contain two copies of a receipt page. This is more important than it might initially seem. Once you receive an FDD (as confirmed by your signature on the receipt page), this starts the 14-day “cooling off” period during which you cannot be asked to pay any fees or sign any agreements.
Again, this is a very brief overview that just scratches the surface of what you need to know about the FDD when considering a franchise opportunity. When you order an FDD review from the Goldstein Law Firm, we will provide an in-depth assessment of the FDD for the specific franchise opportunity you are considering, and then you can use this information to help guide your investment decision.
What You Can Expect to Learn from Your FDD Review
What can you expect from your FDD review, and is hiring a lawyer to review an FDD really worth it? At the Goldstein Law Firm, we provide comprehensive and custom-tailored FDD review services. Buying a franchise is a substantial and high-risk investment, and you need to ensure that you make an informed buying decision. We take this seriously, and we rely on our decades of experience to provide important insights and spot red flags that our clients wouldn’t know to identify on their own. After speaking with your FDD review lawyer, you will have a much better understanding of the risks you need to consider before moving forward.
What Does an FDD Review Cost?
If you have questions about hiring a lawyer to conduct an FDD review, you also understandably have questions about the costs involved. So, what does an FDD review cost? At the Goldstein Law Firm, we provide our FDD review services at flat rates. However, there are a few factors we need to consider before we can give you an accurate quote, and you may want to consider one of our integrated franchise review programs as well. Generally speaking, our FDD review cost is competitive with the fees charged by other law firms of similar size—though not all of these firms bring our level of experience to the table.
Call for a Free Initial Consultation with FDD Review Lawyer Jeffrey M. Goldstein
If you are interested in learning more about our FDD review services, we invite you to get in touch. To get started with a free, no-obligation consultation, give us a call at 202-293-3947 or tell us how we can reach you online today.
