If you have questions about the legal aspects of franchise ownership, you are in the right place. In today’s article, we will talk through these topics, including the often-intimidating Franchise Disclosure Document, or FDD. This document can sometimes come across as scary even though it is a mostly harmless process in the grand scheme of things.
Once you know what you are dealing with concerning the FDD and the Franchise Agreement, you will likely see that while it is a piece of the puzzle, it is not the piece of the puzzle. Today, we want to educate all of our readers about this topic in order to reduce fear surrounding the subject and help you feel empowered on your franchise ownership journey.
In order to create the best content possible, we have partnered with franchise law expert Amanda Dempsey, who is an attorney at Saxton & Stump, a firm in suburban Pennsylvania. She has been practicing franchise law for over 10 years, and her expertise is sure to provide you with all of the helpful information that you are looking for.
Must-Know Franchising Documents
A big part of the process of franchise ownership is the legal side of things. There is this document that comes along as people are vetting franchises called the Franchise Disclosure Document, or FDD. It is pretty light reading, 200 or so pages of riveting legalese, and it can be a little intimidating and a little overwhelming when you first get one. But don’t worry – we are here to break it down for you.
What the Heck Is the FDD?
The FDD gets a bit of a bad reputation in the franchising space, likely because of its size. As Amanda says, these documents can often feel like a bit of a barrier because there are rules around disclosure and waiting time:
“While it can feel daunting when you first get that gigantic document delivered to you, it is really important that aspiring franchisees review the FDD and all of its attachments, including the Franchise Agreement”
The FDD is supposed to be written in plain English, and it is meant to help you interpret more complex pieces of the arrangement that is laid out in the Franchise Agreement, which is the legal document that you will actually sign. The FDD is a formulaic document with 23 items, each of which is the same from system to system.
Why does the FDD have that structure? Well, the document is made according to a consistent template in order to allow you to more easily compare two different business opportunities. If you were considering buying two different franchises, for instance, you could put two FDDs side by side and easily compare the information.
The FDDs include information that the FTC (Federal Trade Commission) considers relevant for people when they are buying into a system: the business experience of the franchise, who owns it, any significant litigation, any bankruptcy history, the financial performance and number of units that exist, the fees you will have to pay, and contact information for all franchisees that are part of the system.
At the end of the day, the goal of providing that information is to make the FDD into a consumer-protection document. Those facts are information the franchisor has to provide to you, and they have to do so in a way that you can understand.
By the time you have finished reading your FDD, you will know a lot about the franchise system you may be buying into. Amanda thinks of the FDD as a “sales brochure” – a long one, sure, but one that includes all the information you would want to know before you decide to purchase the enterprise you are considering.
What About the Franchise Agreement?
An attachment to the FDD, the Franchise Agreement is the legal document that you will actually sign once you decide to purchase the franchise. It is usually a bit more difficult to read through because it’s written in legal terms, but the information matches that in the FDD.
So where do franchise attorneys come in? Well, a franchise attorney can help people navigate these two documents. Franchise attorneys go through them with clients and explain to them certain important and relevant parts, helping them get through the document.
The Role of a Franchise Attorney
Some people like to work with an attorney to review their franchise documents in order to make sure they are not missing anything. That is because most people have not seen documents like these before.
Franchise attorneys can help people navigate the FDD and Franchise Agreement and aid clients in understanding what is typical and atypical. For example, many people initially feel that some of the language in the FDD’s 23 items can be a little bit harsh. But it is important to remember that the franchisors behind these are really trying to protect the brand… one that you may soon be a part of.
Understanding Brand Standards
Franchisors need to protect their brand and its reputation. If you come in and ignore everything they ask you to do and mess everything up, that is (of course) an issue for them and all of their existing owners. And honestly, you should be glad that language related to brand standards is included in the FDD. As a great franchise owner, the last thing you want is another franchisee coming in and diluting the brand by going off the rails.
Franchisors want to ensure brand consistency and make sure all the franchises are doing what they are supposed to. While franchisees are often concerned that there is not enough in the FDD to protect them personally, rather than just the brand, it is important to remember that brand consistency and uniformity are also good for you as a franchise owner.
The franchisor creates a system, they create uniformity within that system. That uniformity becomes their brand name – what they are known for. And it becomes the franchisor’s job to protect that. The way they go about protecting that is to require franchisees to operate within that system’s standards that they prescribe.
These standards vary, covering anything from what products or services can be sold inside a business to the trademarks and how they are able to be used, marketing standards, and more. For example, in a Subway FDD, you will likely be informed that you are allowed to sell only sandwiches, but the Franchise Agreement may also mandate that the inside of the Subway be decorated in a certain way.
While it may not feel like it at first, those requirements are actually ways that the franchise protects its franchisees and gives them value by creating that uniformity. The provisions of the FDD might seem heavy-handed, but that is because the franchisor wants to protect what they have built – and it benefits everyone, including you.
(Let’s be honest: If you are not interested in brand standards and consistency, then franchising probably is not for you. That is going to be a consistent part of pretty much any franchise you’ll find out there.)
With all these standards in place, it is not unusual to receive an FDD and feel a little overwhelmed as you try to review it. That’s one reason why it can be a great move to work with a franchise attorney.
What Does a Franchise Attorney Do?
When you send your FDD and Franchise Agreement over to a franchise attorney, it will typically take them 5-7 days to review. They will read it cover to cover and provide a comment letter that hits the high points of both the FDD and the Franchise Agreement.
Amanda shared some insight into what franchise attorneys look for when they review those documents:
Things that are out of the ordinary
Things that are industry standard but that tend to confuse or surprise clients
Pieces of the Franchise Agreement that don’t get much attention in the FDD.
When a franchise attorney reviews your documents, it can add clarity and ensure nothing gets glossed over. These attorneys are specially equipped to do this job and are able to draw from years of experience in franchise law in order to write these comment letters.
During that process, they will make recommendations about things clients should ask for clarity, request changes, or request additional support. Those recommendations will be in the comment letter. Depending on the industry, there may be some specific points clients want to discuss afterward, and then the franchise attorney will schedule follow-up calls.
Gain Peace of Mind
FDDs all look pretty much the same – they are all regulated by the FTC, so there is only so much variance that can be in them. But again, when you are thinking about investing in a franchise, it is important to ensure you are not missing anything and gain peace of mind.
At the end of the day, that is absolutely the goal. There are some things that may be considered risky for one person but that another person is comfortable with. Reviewing and signing a Franchise Agreement really comes down to each individual’s person’s risk tolerance. It comes down to helping each person make the right decision for them and get on track to being their own boss
For Businesses Becoming Franchises
What we do with FranCoach and our Franchising 101 Podcast is mostly about helping people become franchise owners, but what about the other side? What if you have a cool business and you want to turn it into a franchise? What if you want to become a franchisor?
Amanda shared that her firm does work with franchise brands of all sizes – emerging franchise brands but also middle-market clients throughout the U.S. and internationally. There’s something undeniably electric about working with an entrepreneur who wants to launch a business that will become a franchise.
Many people come to franchise attorneys with the idea that they want to turn their business into a franchise. The franchise attorneys then help them understand the parameters of the model and let them know what rules they will have to comply with.
Some states also require preregistration of the FDD. Believe it or not, most people trying to turn their business into a franchise are doing so because they have gotten some questions and gotten some leads, people asking things like: “Is this business a franchise? I’d like to buy one.”
But it is important not to make sales disclosures from the beginning until you talk through what is appropriate to say with a franchise attorney. Amanda’s firm, for example, does a Discovery Process of its own to help new franchises build out their FDD. This process can take as little as two weeks but normally requires between 30 and 90 days to finish. The timeline all depends on how much information is readily available and how much each client has to put together.
Working with a franchise attorney helps you get your documents in order. That process often gets the client thinking about the system as a whole and how they want to run their franchise system if they don’t have a system in place already. Franchise attorneys help them with that based on their experience over the years and work with other clients. They also do a deep dive into their business and what has been working for them and then focus on how to systemize that and replicate that success.
Ditch the Do-It-Yourself FDD
It is amazing how much goes into taking one business and turning it into a franchise. If you are out there thinking about putting this all together – don’t, even if you technically could. There are so many moving pieces that you may not even know to think of. And that is why it is important to work with an expert when you are building your FDD.
While many “homegrown” FDDs may include some helpful information, there are so many components to the FTC rules that it is rarely worth attempting to create the document without assistance from a pro. Even Amanda admits that the first few FDDs she drafted had to be heavily supervised by an experienced mentor. Creating these documents is a special skill set, and working with someone who knows what they are doing will save you time and energy.
It’s also important to note that you need a franchise attorney when you’re looking at franchise-related things. Whether you are looking to be a franchisee or a franchisor, you will need the specialized knowledge franchise attorneys can provide. You would not want an accident attorney litigating your divorce – in the same way, it is crucial to make sure you choose a specialist that is right for the task at hand.
While reaching out to a franchise attorney may initially seem overwhelming or expensive, it is a crucial step. Within the franchise industry, everyone is here to help. People pull together and help each other get through this. Really, it is just the way the industry is.
If you are looking to get into the industry, whether you are a seasoned entrepreneur buying a package of franchises or buying your first single location because you want to be your own boss, contacting a franchise attorney can be a great first step. Franchising is a way to foster business ownership while still getting support from a franchisor and working off a proven blueprint. Making sure a franchise attorney is involved can help you ensure you are setting yourself up for success as you pursue the path toward owning your own business.
Find somebody in the industry who can help you select the right franchise and help you meet your goals. There are so many franchises out there – different verticals, different types of businesses, and different levels of involvement. So make sure you go after the one that fits you and makes sense for your lifestyle and vision. Working with FranCoach is one way to help you do that.
Who Is FranCoach?
FranCoach is a national search firm dedicated to working with individuals who are interested in owning a franchise. We've partnered with over 600 of the top franchisors in the country, spanning nearly 70 industries.
Our number one goal with our clients is to help them find the absolute best franchise for them to own. Our goal with our Franchising 101 podcast series and this series of informational articles is to help educate people on all aspects of franchise ownership.
Reach out to us to learn more about potentially becoming a franchise owner. There’s never any fee for our service, so why not take the first step today toward your better tomorrow?