The Franchise Agreement is a legal contract and is actually part of the Franchise Disclosure Document (FDD), which is supplied to prospective franchisees. The FDD spells out everything about franchise operations – processes, marketing, costs, support etc. in 23 specific items. The Franchise Agreement is included in item #22, along with any other contracts that must signed, such as real estate leases or financing forms. The Franchise Agreement is attached as an “exhibit” and has blank spaces to be filled in preparation for the franchisee signing the contract.
The FDD ends with a receipt that carries no obligation to the prospective franchisee – it just validates that the franchisee has received the FDD. No money can be exchanged or a Franchise Agreement signed until ten days after acknowledgment of receipt of the FDD. There is also a five-day waiting period for the signed Franchise Agreement once it is completed.
After a prospective franchisee has reviewed the FDD with an attorney and accountant, and is ready to sign the Franchise Agreement, the franchisor will fill in the blanks on the Agreement. These will stipulate in dense legal jargon the relationship and obligations between franchisor and franchisee. Once the Agreement is filled in with the details, the franchisee has five days to return the signed contract.
As part of the FDD, which the franchisee acknowledges receiving, the Franchise Agreement spells out specifics on the initial franchise fee, ongoing fees and royalties, training and length of the contract. All of these should be examined and compared to the FDD items. The Franchise Agreement should reinforce the obligations and expectations described in the FDD.
Because the Franchise Agreement is the binding legal contract between the two parties, any deviation from the FDD must be added to the Franchise Agreement. For instance, if the Franchisor is willing to make an exception regarding premise requirements, or if the Franchise Representative promises extra training or support, then make sure it is in the Franchise Agreement contract. Verbal promises are worthless. The Franchise Agreement, as part of the FDD, implies that everything stated in the FDD is part of the Franchise Agreement. If the franchisee negotiates exceptions that differ, even if only slightly, from the FDD descriptions, then these negotiated exceptions must be detailed in the Franchise Agreement.
The Franchise Agreement is the legal document that governs the relationship between the Franchisor and Franchisee. In the case of any disputes, the Franchise Agreement is the ruling factor about the outcome. That is why it is so important to have an experienced franchise attorney review the FDD and compare it with the Agreement terms. The Franchise Agreement should match the FDD items regarding fees, territory, training and duration of the franchise contract, and any exceptions to those items must be described in specific detail within the Agreement.
To find an attorney knowledgeable about franchise contract law, visit this link.
Click on the Franchisee tab at top, then go the listings at left. At the bottom, you’ll see a tab for attorneys. This takes you to a state-by-state directory of franchise lawyers.
Another helpful source for information is the International Franchise Association.
The Federal Trade Commission oversees franchise contract law, and the Agency’s web site has a Consumer Guide to Buying a Franchise, plus a Franchise Rule Compliance Guide.
The purpose of this article is to provide general information about recent developments in franchising. Nothing in this article constitutes legal advice, which can only be obtained as a result of personal consultation with an attorney.