STEP 2
PREPARING THE
LEGAL DOCUMENTATION
Franchising your business is a very serious decision that takes a lot of thought and careful planning in order to succeed. Without the proper legal documentation, you cannot be a franchise. Not to mention, there are criminal and civil statutes that apply to franchising – specifically with how they are set up and how they are registered. We will draft, review, and file the appropriate legal documentation you need to register and set up your franchise.
Item 1
The Franchisor and Any Parents, Predecessors,
and AffiliatesThis item requires the franchisor to disclose background information on the franchisor and related organizations. It includes the business name, address, and place and date of incorporation.
Item 2
Business Experience
This item requires the franchisor to list the business experience of the franchisor’s directors, principal officers, and other individuals for the last five years. This helps a potential franchisee to assess whether the people managing the franchise have the necessary skills to run the business.
Item 3
Litigation
Here, the franchisor discloses lawsuits involving the franchisor, related entities (such as parents and affiliates), and the people listed in Item 2 (the director and principal officers). The law does not require that every lawsuit be disclosed, but there are specific requirements that lawsuits related to the franchise be disclosed.
Item 4
Bankruptcy
All bankruptcy history of the franchisor, affiliates, predecessors, and parents must be disclosed. In addition, any bankruptcy of individual officers or partners with management responsibility must be disclosed.
Item 5
Initial Fees
This item tells the potential franchisee what fees or payments for goods or services received from the franchisor before the franchisee’s business opens. The federal government requires this so that potential franchisees will understand what they will have to pay in order to open their franchise.
Item 6
Other Fees
This item requires disclosure of recurring or occasional fees such as royalties, advertising fees, and transfer fees. This helps the franchisee understand what they will need to continue to pay throughout the franchise relationship.
Item 7
Estimated Initial Investment
To assist in the accounting a potential franchisee must prepare, this item requires the franchisor to provide an estimate of the cost it will take for the franchisee to open a franchise. It includes expenses of the franchise agreement, rent, equipment, and inventory. This item is disclosed in a chart, outlining the amount of payments, method of payment, when it is due, and to whom the payment is made.
Item 8
Restrictions on Sources of Products and Services
Often, a franchisor will place restrictions on the source a franchisee uses for its goods and services. Those restrictions are disclosed in Item 8. Also, if an officer or affiliate has in interest in a required supplier, that fact must be disclosed here.
Item 9
Franchisee's Obligations
This item consists of a table that the potential franchisee can use for reference to figure out all of its obligations. The table must list the obligation (such as lease, fees, advertising, insurance, and so on), the section of the Franchise Agreement where it can be found, and the Item in the FDD that details it.
Item 10
Financing
For any financing arrangement, the franchisor must disclose the rate of interest plus charges, number of payments, penalties upon default, and consideration received by the franchisor for referring a prospective franchisee to a lender.
Item 11
Franchisor's Assistance, Advertising, Computer Systems, and Training
Usually, the franchisor will provide training and other assistance to the franchisee, and those obligations to assist the franchisee must be outlined in this item.
Item 12
Territory
In order for the franchisee to gauge his potential competition at the chosen location, the franchisor is required in this item to list the conditions under which the franchisor will approve its relocation, as well as any present plans to operate a competing franchise system offering similar goods or services.
Item 13
Trademarks
Most businesses have trademarks on their name and logo. This item requires the franchisee to disclose whether each of its principal trademarks is registered with the United States Patent and Trademark Office. If the franchisor does not have registered trademarks, this item must include a prescribed statement warning potential franchisees of the lack of legal rights and benefits.
Item 14
Patents, Copyrights, and Proprietary Information
Here, the franchisor must disclose the types of intellectual property, their ownership rights or licenses in each, details about and duration of their rights, and any legal proceedings related to those rights.
Item 15
Obligation to Participate in the Actual Operation of the Franchise Business
Sometimes a person will purchase a franchise but hire a general manager to run the business, while the franchisee steps aside. If a franchisor does not allow such arrangements, this is where they would inform a potential franchisee. This item informs the potential franchisee of whether the franchisor requires that the franchisee participate personally in the direct operation of the franchise.
Item 16
Restrictions on What the Franchisee May Sell
If the franchisor chooses to restrict the items that the franchisee may sell, those items must be listed in this item. Thus, if a franchisor prohibits the sale certain goods, or if the franchisor requires that a franchisees sell all of the items franchisor authorizes, those restrictions must be placed here.
Item 17
Renewal, Termination, Transfer, and Dispute Resolution
This item requires a table outlining the provisions of common aspects of the franchise relationship, section of the franchise agreement, and summary of the provision. This section must include summaries of the provisions dealing with termination, renewal, and dispute resolution.
Item 18
Public Figures
If a public figure lends his name or image to the franchise, controls or manages the franchise, or invests in the franchisor, then the franchisor must disclose it in Item 18. This applies where the involved person is someone whose name or physical appearance is generally known to the public in the geographic area where the franchise is located.
Item 19
Financial Performance Representations
This item is optional. A franchisor is prohibited from making any financial representations to a potential franchisee, unless the representation is stated in Item 19 of the FDD. This item has very specific criteria for how the information must be measured and provided, should the Franchisor choose to make financial representations.
Item 20
Outlets and Franchisee Information
In this item, the franchisor must disclose statistics on the number of franchised outlets and company-owned outlets for the preceding 3 years. These tables are designed to capture changes in ownership status. Item 20 also requires the disclosure of contact information for current franchisees so that those considering a franchise purchase can speak with other in their area who already went through the process. Confidentiality clauses between the franchise members, as well as franchise associations, will also be disclosed and explained in this item.
Item 21
Financial Statements
This is where the franchisor provides copies of its financial statements audited in accordance with generally accepted accounting principles. These tables must disclose at least two years of the franchise system’s financial condition.
Item 22
Contracts
In this section, the franchisor must attach a copy of all proposed agreements relating to the franchise offering. If the franchisor offers things to the franchisee, or makes arrangement for the franchisee, those arrangements will be disclosed here in item 22.
Item 23
Receipt
The last item is a receipt with specific requirements. The receipt also lists the titles of attached exhibits neither party misses an attachment to the contract. This is where the potential franchisee will sign if he so chooses.
