As we wrap up another busy FDD renewal season, I am struck how often the “total investment” tension of Item 7 in the FDD is discussed and in my opinion misunderstood and miscalculated. By Tom Spadea
It’s that time again, when most franchisors start to think about updating their Franchise Disclosure Document (FDD) for next year. Around the time this article gets published in early December, if you are a franchisor client of ours, you should be receiving your first “FDD Renewal Reminder” email. By Tom Spadea
The food, beverage and restaurant franchises has always been an attractive investment for many franchise seekers. The reason: everyone needs to eat. By Sue Bennett
Before you Buy
Follow this checklist for due diligence
by Jason Power
You probably research cars before buying one and read a restaurant’s reviews before making a reservation. So it makes sense to do the same research—your due diligence—before investing in a franchise.
The process should include a study of the local market that exists for the franchise’s products and services, conversations with other franchisees, a review of the Franchise Agreement by a lawyer, and participation in the franchisor’s Discovery Day. Follow this checklist to ensure you’re thorough with your due diligence.
1. Research your market.
Does your market need the product or service? Have you called your future competitors to learn about their prices and customer service? Have you tested their products? These actions are crucial. There are dozens, if not hundreds, of stories about a franchisee introducing a product or service that was rejected by people in the territory and the cost to educate them about it was prohibitive.
2. Talk to other franchisees.
Just as you read reviews for a vehicle or look at the menu of a new restaurant, you should learn from those who came before you. When you speak with current franchisees and those who were recently terminated, ask them: Are you profitable? Does the franchisor help with your problems and questions? How do you deal with competitors? If you could go back, would you buy this franchise again? By asking these questions early in the process, you avoid the potential for catastrophe.
3. Have an attorney review the Franchise Agreement.
Having an attorney who is well-versed in franchise law is a must. But you also have to read the Franchise Disclosure Document, Franchise Agreement, and all exhibits, too. If you do not read the documents and then prepare a list of related questions and concerns for the attorney, he or she can’t fully help you understand your rights, roles, and obligations.
4. Attend Discovery Day.
Discovery Day, or “Meet the Team Day” as some franchisors call it, is when a franchisor invites franchisees who are close to signing to visit a corporate location and learn more about the franchise and typical day-to-day operations. This is one of the greatest opportunities to obtain an in-depth understanding of the business and in many cases it is one of the last opportunities to ask the franchisor questions before signing the Franchise Agreement. At Discovery Day, ask questions such as: What is the franchisor’s growth plan for the next one, three, five, and 10 years? What is the franchisor’s marketing strategy for helping franchisees? How are the company’s franchisees performing, especially those in your general area?
Each prospective franchisee’s due diligence checklist will differ slightly, but if you follow the four steps above, you’ll be well on your way to having all the information you need to make an educated decision.
Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. To learn more, contact Power at email@example.com or call 980-202-5679. Visit www.barberpowerlaw.com.
When a Franchisor Goes Dark…
by Jason Power
Certain states require that franchisors register their offerings before they can sell a franchise there. Those same states then require the franchisors to file annual renewals in order to continue selling franchises.
So what happens when you’re prepared to buy a franchise but the franchisor’s state registration hasn’t been renewed yet?
First off, be aware that most franchisors are required to update their franchise disclosure documents in the first few months of each year depending on when their fiscal year ends. This means that these registration states are flooded with documents to review—both renewal applications and new FDDs.
Although the employees in these states work tirelessly to review applications, the process takes time. When franchisors do not file their renewal applications early enough, they may have to stop selling franchises, or “go dark,” until their renewal is approved. (Note that going dark is not a negative reflection on the franchise, but it can delay a sale and frustrate everyone involved.)
What can you do when your franchisor goes dark? Don’t panic. This situation can be a great opportunity for you to reflect on the franchise, call more franchisees for validation, talk in more detail with the franchisor, and work with an accountant or franchise attorney to analyze the opportunity. Sometimes the delay may also present an opportunity to negotiate some terms in the franchise agreement.
What to expect
Also know that this is a process and that many franchisors have this issue each year due to delays in gathering information. You should discuss with the franchisor what, if any, changes are being made to the franchise disclosure document and franchise agreement. A franchisor often will increase fees or change the size of territories during these annual updates. If the expected terms are less favorable than what you’ve already been shown, ask the franchisor to give you the more favorable terms.
Once the state approves the renewal application, the franchisor will be required to send you the new franchise disclosure document and franchise agreement. Usually you will be asked to sign a new FDD receipt and wait for the required disclosure period to lapse before you can sign the new franchise agreement, but some states have exceptions to this requirement. For instance, California and New York will allow franchisors to send a copy of the franchise disclosure document as long as they have filed for renewal, include certain disclaimers, and follow other directions required by the states.
This is in no way a comprehensive explanation of the requirements for all registration states. If you are involved in a pending franchise sale with a franchisor that has gone dark, the best thing you can do is talk with the franchisor about its process during this time period and talk with a franchise attorney who can guide you through the few weeks until the franchisor’s application is renewed.
Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. For more information contact Power at firstname.lastname@example.org or call 980-202-5679. Visit www.barberpowerlaw.com.