Are you thinking about franchising?
Under federal and state law, a would-be franchisor must comply with various franchise specific laws before offering franchises. There are 23 specific items included in the franchise disclosure document (“FDD”). The FDD is the primary legal document required to franchise and it contains all of the contracts that will govern the franchisor and franchisee relationship. There are non-attorneys that purport to offer FDD preparation, but its best to leave the legal documents to attorneys with specialized knowledge in franchise law.
How is information gathered to create the FDD?
The first step to drafting an FDD is gathering the necessary information. This is a joint effort between business leads and the attorney drafting the disclosure document. The attorney needs to understand the business, objectives, and risk tolerance. Likewise, the business leads need to provide the required information and document their systems and processes.
Collecting the Required Information
There are two methods utilized by our franchise law firm to collect information for the FDD. The method depends based on our clients need.
Option 1: The attorney meets with the client to understand the business. After the meeting, the attorney sends a comprehensive initial questionnaire to the client. This questionnaire provides a layout of the business and covers all 23 areas required by federal law. The attorney will follow up with client meetings to discuss business and legal issues. With an understanding of the business and the objectives of the franchisor, the FDD will accurately reflect the franchise opportunity and the contracts will be drafted to encompass the rights and obligations of franchisor and franchisee. Guidance will be provided on best practices.
Option 2: The attorney and client will start with an initial meeting. The goal of this meeting is for the attorney to understand the business and discuss a time line for completion. The attorney and client will develop a schedule for one-hour meetings to discuss each of the 23 items of disclosure. Meetings will also focus on the business outlook and philosophy on support and enforcement. Under this method, the attorney and client will develop the FDD item-by-item. In some cases, multiple items will be discussed during a meeting and in some cases it will take several meetings to complete a single item. After an item is discussed, the attorney prepares a draft of such item and sends to the client for review. Revisions are made as the document is being created. This method is time consuming, but allows the attorney to explain the nuances of each individual item and is often the best approach for franchisors new to franchising. Our goal is alway to empower clients to truly make informed decisions, but this level of support isn’t offered by most franchise law firms because it is so time consuming.
Documenting all systems and processes
Franchising requires great systems and processes that are well documented. In order to franchise, a business must determine the products and services it will offer, along with the level of support it will provide. While the attorney can provide guidance and competitive analysis, the client will develop a training schedule and operations manual.
How much does an attorney charge to create a franchise disclosure document?
The fee to prepare the FDD will vary from firm-to-firm. We tailor our services to meet our clients needs and adjust our fees to meet those needs. Our fee to prepare a new FDD is typically $18,000.00 to $30,000.00. Franchise consultant firms will often charge $50,000 to $100,000. Regardless of who you use, we recommend engaging a franchise attorney directly to prepare the FDD.
Are there ongoing legal fees when franchising?
Once the disclosure document is created, we often serve franchise clients on a monthly basis as outside general counsel to handle registration and disclosure of the FDD, draft franchise agreements, and manage client relations. Franchising does require ongoing legal assistance to maintain compliance and protect the brand. The legal costs are unavoidable if you want to grow and maintain compliance.