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Franchising Contracts: How to Review Your Potential Franchisor’s FDD

Reviewing a Franchise Disclosure Document can be straightforward for investors entering the franchise industry.  To arrange this, act wisely from the very start when researching a new franchise investment opportunity: seek the aid of a legal professional with experience in franchise law.  Yet what aspects of the document can potential franchisees particularly examine to get a handle on this extensive document and what areas might a professional examine closely while reviewing?

Most all legal professionals with a background in the world of franchising contracts fix their attention on the following points based on the needs of their clients:

- The energy surrounding the contract, or what the wording and layout communicates about the particular franchise system in question.  This aspect of examining an FDD is critical because reading between the lines, and the details of each Item in the document, the reader can get a picture of how the franchisor approaches agreements and contracts in general, characteristics of the franchise system’s culture, and details that portray what signing the agreement may mean for the potential franchisee on a more personal level.

- The quality of the franchisor’s disclosure and comments related to each Item requirement.  From start to finish, an FDD that conveys a diligent and engaging franchisor usually means the franchisor and the franchise system is established or at least aims to be communicate completely with potential and existing franchisees.

Communication is key in any relationship, and relationships between parties in the franchise world are no exception.  Attention to the overall approach of franchisors, coupled with their compliance to Federal Trade Commission requirements, can indicate whether the franchise system is built on a culture with which potential franchisees may be compatible.

- The distribution of online based revenues.  In today’s world full of technology based interaction with consumers, it is important that franchisees be aware of their territory rights.  This may involve delineating the scope of geographic and virtual territories and the limits placed on how revenues are allotted based on those territories.

Who is compensated for consumer sales, franchisor or franchisee, and a breakdown of how revenues are distributed, particularly if revenues stream from consumer purchases through online sources, is best understood prior to signing.  Item 12 of the FDD covers agreements surrounding territory and may augment a potential franchisee’s understanding of the franchisor’s stance on Internet and social media based revenues, including whether they are considered part of franchisee territory or not.  Having this information in advance allows potential investors in the brand to manage expectations and understand more fully how online based revenues are distributed.

- The expectations surrounding semi-absentee franchising.  For potential franchisees seeking legal support with their FDD who wish to remain semi-absentee in their franchise investment while pursuing other careers or life goals, Item 15 discloses requirements surrounding franchisee presence and whether or not involving others to manage daily operations is possible.  The details of this section of the agreement can highlight a franchisor’s stance on the matter initially as well as long term, and franchisees can then gain a greater picture of whether the concept is compatible with their wish to remain in a supervisory role rather than a daily operations managerial role at the location.

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