By Anthony J. Cox, Esq.
Starting a new franchised business can be an exhilarating experience, combining the thrill of engaging in a new business with the confidence that comes from having the backing of a successful brand. New franchisees, however, are responsible for mastering a significant amount of information in the early stages of the process.
First, the franchisor must issue to potential franchisees a Franchise Disclosure Document (“FDD”). Governed by the Federal Trade Commission’s “Franchise Rule,” the FDD is a lengthy document (often running several hundred pages), containing important information that the franchisor is required to disclose. My colleague, John Polinko, reviews some of the key specifics of an FDD in his article below.
The FTC requires disclosure of these material facts and franchisors must update the disclosures at least quarterly to reflect any material changes. Franchisors should be careful to fully disclose all material changes and all material information. Recently, transactions involving “insiders” without disclosure have drawn the scrutiny of the FTC. Similarly, franchisees should take note of any revisions to the required disclosures as it could highlight certain changes in the franchise system or expected financial results.
Next, the Franchise Agreement ultimately governs the relationship between franchisee and franchisor. Franchisors have significant bargaining power in this negotiation, but franchisees should understand this agreement in detail. The Franchise Agreement often imposes obligations on franchisees that are surprising once operations actually commence. Engaging your counsel to assist in this review is very important.
This is but sampling of the various issues a franchise start-up might encounter. Our Firm represents both franchisors and franchisees in the franchise process, so give us a call with any questions.