Anatomy of a Franchise Deal in 3 minutes
Buying or selling a franchise? Here’s what you need to know in 3 min or less.
The Franchise Disclosure Document (FDD).
The FDD is a hefty document that all franchisors must provide to prospective franchisees. It is regulated by the Federal Trade Commission (FTC) and contains 23 mandatory items of key information that must be shared with prospects so that they can make an informed decision about purchasing a franchise business. When considering buying a franchise, you should work with an experienced franchise attorney who can evaluate the FDD and let you know whether there are any red flags. Among other things, the FDD contains information about the financial health of the franchisor, financial performance of franchisees in the system and fees required to get into the system (franchise fee) and stay in it (royalties). It also contains information about any litigation between the franchisor and its franchisees.
The Franchise Agreement.
The Franchise Agreement is the key exhibit to the FDD. This is the formal contract between the franchisee and the franchisor. It contains much of the same information as the FDD but can often be negotiated to save a franchisee money and reduce liability. It also contains its own exhibits, such as a personal guaranty. Examples of items that this law firm has negotiated are: reduced franchise fees, reduced renewal fees, reduced royalties/advertising fees, reduced transfer fees and softened post-term non-competes.
The Asset Purchase Agreement.
The Asset Purchase Agreement (APA) is the key contract between the buyer and seller of a business. While the franchisor may be involved and may require certain terms be included, the true parties to this agreement are the buyer and seller and they should each have attorney representation to ensure their interests are protected. Unlike a franchise agreement which can be difficult to negotiate, an APA is fully negotiable. This means each party should have it reviewed to ensure it protects them in the following areas: price (up front and carry-back notes), reps and warranties, non-competes, assets included and excluded, purchase price allocations, and much, much more.
Experience matters. Use an attorney who has extensive experience in franchise law.
BUYING OR SELLING A FRANCHISE?
Isabel Gram, JD. Business and Franchise Attorney with 14 years of experience.