Looking into a Franchise? You May Need Help With the FDD

April 28, 2011

Looking into a Franchise? You May Need Help With the FDD

Anyone looking into a franchise should understand the complexity of the endeavor. This type of business venture can definitely be a rewarding experience, but overcoming a few tough hurdles, like working through and understanding the details of a Franchise Disclosure Document (FDD), is vital.

What is a Franchise Disclosure Document?

The Franchise Disclosure Document (FDD) is a disclosure document with multiple attachments that details the purchase arrangements of a franchise. Some FDDs are exhaustive and massive -- hundreds of pages. And interpreting the Federal Trade Commission's (FTC) 124-page-long compliance guide outlining franchisor disclosure rules doesn't make things easier.

The exhibits to the FDD include the franchise agreement and other relevant agreements controlling the franchise relationship.

The FDD also provides information regarding the identity of the franchisor and any parents, predecessors and affiliates; the management team; the initial fees and estimated initial investment; franchisee's obligations; renewal, termination and transfer requirements and dispute resolution methods.

The FDD also includes Item 19 -- the financial performance representation. This is not mandatory. This is where the franchisor can provide specific information concerning the potential performance of the franchise and lists a specific degree of actual or potential sales, income, gross or net profits of the business.

Having an Experienced Franchise Attorney on Your Side

Because of the size and the technical nature of the FDD, unless a person possesses a great deal of knowledge about franchising, he or she will simply not have the experience needed to fully understand the ramifications of its myriad entries. It is vital to hire an experienced franchise attorney who can help:
-Determine what suppliers are required or can be used
-Calculate whether the advertising support and contribution is adequate or reasonable
-Determine how the exclusivity or non-exclusivity of the territory may affect the business
-Explain how to handle trademarks, patents, copyrights, proprietary information, confidentially agreements and non-compete agreements
-Understand the franchisee's obligations, renewal, termination, and transfer rights
-Comprehend dispute resolution terms
-Understand what an agent for service of process is
-Assess the offer of financing terms

These are just a few examples of what an FDD will contain. The FDD is multifaceted so seeking the help of experienced franchise attorney is invaluable. A lawyer knowledgeable in this area of law can go over the specifics of the agreement, line by line, making sure every right and obligation is understood.

Article provided by Einbinder & Dunn LLP
Visit us at www.ed-lawfirm.com