For those of you looking to buy a franchise, you will want to understand the two main legal documents that pertain to the franchise buying process — the Franchise Disclosure Document (FDD).
Let’s first cover the FDD. The FDD was originally known as the Uniform Franchise Offering Circular (UFOC) prior to changes made by the Federal Trade Commission in July 2007. The FDD, as it is now known, is designed to provide prospective franchisees with information about the franchise so they can have all the facts before finalizing their decision to buy. There are a total of 23 items covered in the FDD. Here are a few of the key items included:
- information and background on the franchisor
- the franchise’s key staff
- information on management’s experience in operating a franchise
- initial franchise fee – describes the cost involved in starting and operating a franchise
- franchisee’s estimated intitial investment
- the franchise’s litigation history – including, but not limited to, any bankruptcy filings
- territory rights
- contact information on other franchisees (current franchise owners)
- delineate the responsibilities of the franchisor and the franchisee
- Item 19 – Financial Performance Representations – this is an optional disclosure
- Item 21 – Financial Statements – provides important information about the franchise company’s financial status
Franchisors must provide the prospective franchise buyer at least 10 days to review the UFOC. This “ten day rule” is a cooling off period whereby the franchise buyer has time to review all of the information, think through everything, ask questions, and ensure they are comfortable with their decision to move forward with the acquisition. Prospective buyers are not allowed to sign the franchise agreement until this “10-day period” has occurred.
Now, on to the Franchise Agreement. The franchise agreement is the legal document that specifically governs the relationship between the franchisor and the franchisee. Like the FDD, the prospective buyers have a “5-day cooling off period” in which they are provided time to review and carefully think through the terms of the Agreement before signing it.
As always, it is recommended that the prospective buyer consult with an experienced attorney familiar with the buying and selling of franchises. The time and money spent carefully reviewing these documents and getting all of your questions answers, can save you much money and frustration down the road!
We wish you all the best, and as always, if you have questions or comments, feel free to leave us a message by clicking on the CONTACT US LINK. Thank-you.
