Tuesday, July 26, 2016

Franchise Disclosure Document Dissected - Part One

After reviewing hundreds of Franchise Disclosure Documents (FDD), writing and developing dozens of FDDs, and practicing in this area for 30 years, a few insights have come my way. Insights that may be of value to franchise purchasers and franchise companies alike.

It is hard to fit them all into this space so I will address this in a series of posts and hit the highlights:

  • The Trademark - arguably the most important "asset" in a franchise system, the primary trademark is required to appear on the Cover Page and to be discussed in Item 13. Franchise systems should always make sure the correct PRIMARY mark is used on the Cover Page. It would seem that the primary mark should be one that is registered on the USPTO's Principal Register. I see FDDs that display a registered mark in Item 13 but it is not the one on the Cover Page. Is this because the "registered" mark is not the primary mark or because the mark on the Cover Page is the primary but unregistered mark? Either way it is confusing. Plus, franchise buyers should be more comfortable when the primary mark that they will do business under is registered.
  • Business Experience - FDD Item 2 requires disclosure of the business experience or "job experience" of the the main officers and directors - but only for the last five years! Franchisors that tell us where the officers went to high school and add flowery business accolades reveal an amateurish knowledge of the requirements, may face push-back from franchise-registration-state-examiners, and, in some states, create an unwanted "technical" violation. This five-year limit, however, should not stop franchise buyers from investigating the officers and directors. In the age of the internet, there are many sources for the background of individuals and businesses.
  • Litigation - FDD Item 3 deals with certain lawsuits that the franchise system (parents, predecessors and affiliates) and its main officers are or have been involved in (different disclosure time-frames apply to different types of litigation). Some lawsuit descriptions, however, end with the statement "This case was settled by confidential settlement agreement" -- meaning, the reader is not informed of the outcome of the suit. Since the 2007 adoption of the Amended FTC Rule, this practice is not permitted. According to the Rule, settlement terms must be disclosed regardless of whether the agreement is confidential (unless the settlement was entered into before the company started franchising or before July 1, 2007). Again for franchise companies: push-back from state-examiners and unwanted "technical" violations may result. For purchasers: press for the information that is required by Rule,
Enough for now!

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