We have finally made our decision and made a verbal commitment to invest our capital into a restaurant franchise. We have reviewed our business plan with the franchisor; now it is time to execute a franchise with a franchisor. There are three things the franchisor will be expecting from you. As we explore these expectations, you would think they are common sense items. But we have experience in the past franchisees seem to forget their obligations. In question four, we will talk about payment obligations, support of the brand, and signing of the franchise disclosure document.
Let’s take a look at these three obligation in this blog.
Question #4 – As a Restaurant Franchisor, what would you expect from me?
1.Payment of “Franchise Fee/ Royalty Fee”
2. Support the “Brand”
3. Sign and execute “FDD”
Let’s review each one of these;
1. Franchise Fee/ Royalty Fee
a. Franchise Fee – this is a fee commonly charged when purchasing a Franchise Agreement and varies based on which franchise you purchase.
b. Franchisee Royalty Fee – Every Franchise has a fee commonly assessed for the rights to utilize their name. These fees are commonly assessed weekly, every two weeks or monthly depending upon the franchise organization. Franchisors can have these fees ACH’d from your bank account, which is fairly common.
2. Support Brand
a. There is an expectation from most, if not all franchise organizations to support the “Brand”. The term “Brand”, refers to and not limited to intellectual property that supports the franchisors and, image and the logo. More brand information in the Franchise Disclosure Document (FDD).
3. Franchise Disclosure Document (FDD)
So what is the FDD?
A franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process in the United States. It use to be the Uniform Franchise Offering Circular (UFOC) (or uniform franchise disclosure document), prior to revisions made by the Federal Trade Commission.
a. At least two weeks prior to signing a franchise agreement, you’ll receive a Franchise Disclosure Document (FDD) from the franchisor as mandated by the Federal Trade Commission. Drafted by franchise attorneys, these complicated documents typically run to hundreds of pages, and the language can be intimidating.
Here is a detailed look at the 23 items in the FDD. We’ll walk you through, explaining the importance of each item and pointing out potential red flags.
The Franchise Company
An overview of the history, ownership and corporate family of the franchisor, including the types of franchises offered. Watch out for: A company overview that isn’t clear or readable. If you can’t get an accurate picture of the organization here without a lot of efforts, it is likely you will have issues deciphering the rest of the FDD.
Business experience of franchise executives Information of the franchisor’s leadership
Lets you know about any litigation involving the company and its principals and directors.
Officer or director who has a personally filed bankruptcy, or have previously involved in a bankrupt franchisor, must be listed.
Items 5, 6 and 7
Initial fees, Other fees, and Initial Investment
There is an overview of the initial fees required to open your franchise
Restrictions on Sources of Products and Services
The franchisor is exercising the right to know that the products and services you are utilizing or selling meet its standards.
The best single disclosure you will get; it is a list of your contractual obligations, with cross-references to the franchise agreement and the rest of the FDD. Item 9 allows you to see each obligation, and then go back and read the language by which you will live and breathe. Watch out for: FDD descriptions that are not consistent with the franchise agreement.
Item 10 informs whether the franchisor offers a lending program or if the franchisor has relationships with lenders who have agreed to help support/ finance its franchisees.
Franchisor’s Assistance, Advertising, Computer Systems and Training
This is the outline of the content and scope of the franchisor’s support services. It may also include disclosures about cash registers and related information involving the use of extremely sensitive franchisee data to which the franchisor has access.
Provides information for restricted territory.
Items 13 and 14
Trademarks and Patents, Copyrights and Proprietary Information
Lists the trademark and copyright registrations the franchisor has obtained.
Operation Participation of the Franchise.
The franchisors want to ensure franchisees give full time effort to oversee/ operations of each location. Some franchises require franchisees to operate the day-to-day business themselves, some may allow them to be passive owners and hire someone else to manage day-to-day operations.
There may be restrictions to what you can sell and what the franchisor will allow.
Renewal, Termination, Transfer and Dispute Resolution
This item provides a summary of the franchise relationship to the franchisee, with regards to the franchise agreement, showing terms of termination and renewal and stating where and how disputes will be resolved.
Item 18 relates to if you are invested of less than 1 percent of franchise that use public figures in their advertising.
Financial Performance Representations
One of the most important pieces of the FDD, very few of franchisors give information on how much their existing franchisees are earning; others must say that they choose not to make a claim. Watch out for: Earnings based on corporate locations, because they pay no royalties and possibly have dissimilar labor, rent, product and shipping costs, etc. Also, be careful of earnings based on franchises that have been in business for 6-10 years, which may pay lower rents.
Franchise Information & Locations
These shows the number of franchises that have been opened, those that might have been transferred and closed in the last three years, which lets you see if the organization is experiencing growth or decreasing in size . The most important part of the FDD is the list of current and former franchisees. A good idea would be to contact as many franchisees as possible to get an independent perspective on the health of the system.
Must provide audited financial statements to let you know if the franchisor is stable. Look at the P&L’s first, then the balance sheet. A good idea might be to have an accountant figure out whether the current percentage of assets to liabilities is favorable and how the franchisor accounts for deferred revenue. Ensure you read the footnotes.
Items 22 and 23
Contracts and Receipts
This line includes the contracts that are required a signature and that you have received and signed the FDD. It is crucial that you read and understand the contracts and keep copies of all documents (including the receipt); you’ll need them if you ever wish to bring any action against the franchisor.