Franchise Disclosure Documents (FDD) - Review Costs; How Much Should You Pay?

Trading Your Briefcase For An Ice Cream Scoop

You’re excited about buying a franchise, taking the plunge, ready to trade your briefcase for an ice cream scoop. The company’s told you it’s the opportunity of a lifetime, given an impressive tour of their headquarters and taken you to a couple of their operating outlets. When the day ended, they presented their FDD or Franchise Disclosure Document. The representative told you to read it and the contract couldn’t be signed for at least 14 days. Who do you use and what's it going to cost to review your FDD?

Using A Lawyer Or An Accountant?
Glancing through the document, the first thing you notice is it’s very dry and technical – just the thing to read if you’re having trouble getting to sleep at night. You notice something in bold print on the cover page about showing it to a lawyer or an accountant. Certainly there’s a big difference between a lawyer and an accountant you note. Why would the government say you could use either one? Since the investment in this franchise is a bit north of $250,000 you wisely decide an attorney makes a lot more sense than an accountant. But lawyers and franchise attorneys are expensive and what kind should you use?

In the above hypothetical the good news is the franchise investor is on track to use an attorney to review the FDD. Franchise Disclosure Documents are complicated, often running into hundreds of pages, with many tables that only reference sections of the complex and verbose franchise contract containing boilerplate that bites. The tables reference these sections, but don't go into any of the details about the biting process. It’s absolutely essential to use not only an attorney, but a "franchise attorney" to review these FDD’s. The bad news is many franchise investors shy away from paying for independent advice. I consulted with a couple after-the-fact who invested over $1 million in a horrible franchise. Before investing all of their worth in this franchise, they failed to invest even one dollar in a legal or business review-analysis.

Why Use A Franchise Attorney?
Based on my review of over 500 FDD’s, I’ve learned a lot. Perhaps the most important lesson is when it comes to franchise agreements, you don’t get what you deserve or even what’s fair – you get what you negotiate. I’ve noticed a disturbing trend that franchise companies, especially new ones, are including very unfair provisions in their franchise contracts. As long as the applicable contract sections are disclosed in the relevant tables contained in the FDD, they’ve fulfilled their legal disclosure obligations. But, if you don’t see these flashing red lights and sign up, you'll be up the proverbial creek without a paddle.

That’s a franchise attorney’s function – to see the flashing red lights that you don’t even notice. Don’t forget, a franchise is a long term legal and financial commitment – usually 10 to 20 years minimum. There's the franchise contract and the commercial real estate lease, the initial investment of hundreds of thousands of dollars AND the cash reserves needed to hopefully reach the break even point - which can be years down the road in many cases. It’s suicidal to spend what often amounts to a significant amount of one’s net worth, and taping into the rest over a 10 to 20 year period without seeing what you’re jumping into. Look before you leap into a big, dark hole.

Cost To Use A Franchise Attorney
So what does it cost to have a franchise attorney review an FDD? A $1,000 to $3,000 up front retainer (meaning pay this now, plus more later on) applied against hourly rates of $300 to $500 per hour is par for the course these days. That’s not unreasonable, given the magnitude of just the initial franchise investment and the 10 to 20 year legal and financial commitments that will end up being a large multiple of the initial investment amount. But is there is any other competent, franchise attorney review options?

FDD Evaluator
Over the past 29 years, I’ve reviewed a lot of FDD’s (formerly called UFOC's). I also owned and operated a franchise myself, so I know how to detect the good, the bad and the ugly in franchising. Franchise Foundations has developed a unique review program called FDD Evaluator (sm). A flat fee of $600 covers a review of the FDD and gives a thumbs up or down on the franchise. The review also includes disclosing any red flags or unfair contractual provisions discovered. Assuming you decide to move forward at that point, you can either negotiate the unfair provisions yourself – which many clients do successfully – or you can retain someone for that specific task.

Negotiation of Franchise Contracts
Contrary to what many franchise companies say, there is a lot of negotiation possible, especially with unfair contract provisions and even more so with new or small-to-medium size franchise companies. Now, if you’re dealing with a McDonalds or other blue chip franchise company, forget about franchise negotiations. But you can also forget about unfair contract provisions – they’re well beyond that. Remember to safeguard your franchise investment by using a competent franchise attorney.

Copyright 2008-2009, Kevin B. Murphy

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