Cost to Review Franchise Disclosure Documents (FDD)
You’re excited about buying a franchise and are 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?
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 usually north of $250,000 (and more if you're signing a commercial lease) you wisely decide an attorney makes a lot more sense than an accountant. But lawyers and attorneys are expensive and what kind should you use?
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, especially in these days of "boilerplate that bites," you don’t get what you deserve or even what’s fair – you only 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. It’s suicidal to spend what often amounts to all or a significant amount of one’s net worth, and an even greater amount over a 10 to 20 year period without seeing what you’re jumping into. Look before you leap into what can be a big black hole.
Cost To Use A Franchise Attorney
So what does it cost to have a franchise attorney review an FDD? A $2,000 to $5,000 up front retainer applied against hourly rates of $350 to $800 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 multiple of the initial investment amount. But what else needs to be considered?
Not Just Any Franchise Attorney
Franchise attorneys (unless they have an MBA or have owned a franchise before - two critical criteria) only do a legal review and the legal perspective is actually less than half the story. It's like a car engine running on less than half its cylinders: the going will be very rough and you won't get far. The business and financial aspects are almost always so much more important than the legal aspects.
An Actual Real Life Example
I completed a comprehensive FDD Evaluator some time ago and unfortunately (and rarely) it was a "two-thumbs down, way down" for some issues that there so serious they were terminal and couldn't be dealt with. The client wisely took my advice and walked away. Then, a couple weeks later, I get a call from another lady who bought this exact franchise two years ago and encountered the same issues I'd found, but at a cost to her of over $450k by the time she was "all-in," which included all of her savings and retirement accounts. Turns out, the recommended "prominent franchise attorney" she used didn't mention any of the big-picture issues I found - just recommended some tweaking of a couple provisions in the contract, like changing a notice period from 30 days to 45 days, etc. Again, very few franchise attorneys have an MBA and virtually none have ever owned and operated a franchise before.
Negotiation of Franchise Contracts
Contrary to what many franchise companies say initially and especially in today's economy, a lot of negotiation is possible, especially with unfair contract provisions. Even more so with new franchise companies wanting to establish a beach head in the franchise industry or establishing a presence in another state. 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 beyond that. Remember to safeguard your franchise investment by using a competent franchise attorney.
copyright 2008-2014, Kevin B. Murphy
By Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.
Franchise Attorney and Expert Witness
ABOUT THE AUTHOR: Kevin B. Murphy, B.S. M.B.A., J.D.Franchise Attorney and Expert Witness
Mr. Murphy, a San Francisco franchise attorney is an internationally-known franchise expert, author, and instructor - known in the industry as Mr. Franchise. For the past 34 years he has specialized exclusively in the franchise industry and owned a very successful franchise in the home improvement field. He has written over 30 publications, including four books on franchising and one book on trade secrets. He instructs franchise company personnel in best franchise practices and teaches franchise, licensing and intellectual property courses to attorneys. Mr. Franchise is a franchise attorney and Director of Operations for Franchise Foundations, a San Francisco-based professional law corporation.
Copyright Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.
