June, 2010

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Must Read: The Federal Trade Commission (FTC) Franchise Consumer Guide

Monday, June 21st, 2010

Below please find a link to the FTC “Buying a Franchise: A Consumer Guide,” which is a must read for all prospective franchisees. Here is the link: http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm.

While the information contained in the FTC Franchise Guide is no doubt basic to a franchise professional or franchisor representative, the Franchise Guide unquestionably provides useful information to prospective franchisees who often times know very little about the franchise sales process, federal and state franchise registration and disclosure laws, or the franchisor/franchisee relationship. Without a doubt it is an excellent foundation for a prospective franchisee’s due diligence.

Some topics addressed in the FTC Guide are: where to look for franchise opportunities, what makes up the Franchise Disclosure Document (FDD), to be aware of unauthorized financial performance representations/earnings claims from a franchisor if not found in the FDD, and where to obtain additional sources of information during the due diligence phase, including obtaining the assistance of experienced franchise counsel.

I strongly encourage any prospective franchisee reading this blog to click on the above link and download a copy of the FTC Guide.

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Franchise Law and Future Royalties

Wednesday, June 16th, 2010

Case law on the subject of a franchisor’s ability to collect future royalties, that is, royalties for the remainder of the term of the franchise agreement, is conflicting. Courts across the country have been unable to agree on when a franchisor may collect future royalties.

While guaranteeing the collection of future royalties from a terminated franchisee is impossible, there is one obvious but often overlooked way to increase the likelihood that a court or arbitrator will find in the franchisor’s favor when faced with the issue. That is, to disclose to the franchisee in the FDD, and include language in the franchise agreement, stating with specificity the franchisor’s policy on collecting future royalties. State for what period of time the franchisee willl be responsible for such royalties, ie for a certain number of months, or until the end of what would have been the franchise term. Also include what amount the franchisee will be expected to pay, for instance the average royalties paid by the franchisee over the past 6 or 12 months, or whatever time period the franchisor seeks to use.

Including specific and detailed language in the FDD and franchise agreement will not guarantee that a franchisor prevails with regard to a future royalties claim. However, NOT including such language will in my view guarantee that the franchisor loses such a claim.

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FTC Franchise Rule Requires Audited Financials Except for Start-Up Franchisors

Tuesday, June 15th, 2010

A franchisor client recently asked me for clarification on the revised FTC Franchise Rule, specifically, whether audited financials are mandated by the FTC Rule in non-registration states, or whether less restrictive and less costly “reviewed” or “compiled” financials will suffice. The answer is clear that the revised FTC Rule does indeed require audited financials, with an exception for start-up franchisors:

Item 21: Financial Statements.

(1) Include the following financial statements prepared according to United States generally accepted accounting principles, as revised by any future United States government mandated accounting principles, or as permitted by the Securities and Exchange Commission. Except as provided in paragraph (u)(2) of this section, these financial statements must be audited by an independent certified public accountant using generally accepted United States auditing standards. Present the required financial statements in a tabular form that compares at least two fiscal years.

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