Why Have a Professional Review My FDD?
Typically one of the first questions I hear from any potential franchisees reaching out to Reidel Law Firm to inquire about the FDD review process. Franchisors, in my experience, will recommend that they have the FDD reviewed by an attorney but will then qualify it by saying that most terms in the agreement are not negotiable. They are doing a very serious disservice to their franchise system and potential franchisees through this qualification. Though it may very well be true, that they are not willing to negotiate on terms (imagine McDonald’s negotiating terms on the thousands of franchise agreements they have executed) but the qualifier that a potential franchisee hears a the end is: ‘don’t bother paying for a review because it won’t change.’
There is much danger in this type of thinking, especially for franchisors. One of the most important requisites for successful franchisees is that they are well informed about the franchise system and their contractual obligations. This prevents many easily avoidable situations in the future for both franchisees and franchisors. Below are some of the main reasons every potential franchisee should have a professional help review their FDD before taking the leap to join a franchise system.
The biggest role I play in reviewing FDDs for franchisee clients is educating them on their obligations and expectations within the franchise system. Even for experienced business owners there will be alien and unexpected terms and obligations for those who have never been a part of a franchise system previously. Even sophisticated clients may find certain terms surprising, like unilateral manual modification, liquidated damages, or transfer restrictions. Any professional review of an FDD and FA will walk a potential franchisee through their obligations and key provisions affecting how they will operate, exit, transfer, or renew the contract.
Another advantage I can pass on to my clients is my knowledge of industry norms. Any franchise industry professional has read many FDDs and will recognize industry norms and standards. I can quickly notice whether a particular franchise system is in line with industry standards or not. Many franchise professionals whether attorneys or consultants or other specialists typically read and even write many FDDs and FAs each year. They will often have a keen eye for finding deviations in industry norms. This is also a good reason to have a professional who is familiar with franchising rather than a general business professional, as there are many differences between a franchise contract and other typical business contracts.
Franchise System Insight
An industry professional can usually offer additional insight into how a potential franchise system is structured and help identify potential future concerns for a client. This can be very valuable counsel and range from simple insights such as executive turnover to potential hiring issues or even permitting or licensing concerns for franchisees. Though this are sometimes disclosed in the FDD, someone not aware of the gravity or context of certain issues may completely miss highlighting those on a reading of the FDD.
Counsel for Negotiating Modifications
While modifying the franchise agreement is a difficult project for most franchise systems, professionals familiar with the industry will know what the franchisor will typically want to hear when requesting certain modifications. For instance, some franchise systems require a monthly minimum royalty payment from the beginning of the business or even from the beginning of signing the FA. This is often a concern for potential franchisees as they will be liable for a monthly minimum while they are starting operations and generating business. I usually counsel my clients that is common sense to discuss this with the franchisor and request to use any abated monthly minimums to fund additional local advertising. Of course whether any system is willing to consider this is based on many factors but this is one of the better ways to approach the issue in my experience in the industry.
At Reidel Law Firm we are intimately familiar with the franchise industry and the challenges for both franchisors and franchisees. We read, write, and register many FDDs each year and can assist you in whatever franchise project you have before you. Reach us by the email button below or by calling us at +1(832)510-3292 to get us on your team for your franchise project today.