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FDD – Sample Franchise Disclosure Questionnaire

Friday, October 26th, 2018

Below is a sample franchisee questionnaire that I recommend be included as an exhibit in each FDD I prepare.   In the event of a problem with the franchisee in the future, it is a powerful document for a franchisor to have, where the franchisee essentially stated at the time of sale that everything told by the franchisor to the franchisee during the sales process was included in the FDD.  In other words, no oral promises, representations or statements were made by the franchisor that did not mirror the FDD.

[SAMPLE]

FRANCHISEE DISCLOSURE QUESTIONNAIRE

As you know, _____________ “Franchisor” and you are preparing to enter into a Franchise Agreement for the operation of a Franchised Business. In this Franchisee Disclosure Questionnaire, Franchisor will be referred to as “we” or “us.”  The purpose of this Questionnaire is to determine whether any statements or promises were made to you that we did not authorize and that may be untrue, inaccurate or misleading.  Please review each of the following questions carefully and provide honest and complete responses to each question.

1.  Have you received and personally reviewed the Franchisor’s Franchise Agreement and each exhibit, addendum and schedule attached to it?

Yes        No

2.  Do you understand all of the information contained in the Franchise Agreement and each exhibit and schedule attached to it?

Yes        No

If “No”, what parts of the Franchise Agreement do you not understand?  (Attach additional pages, if necessary.)

3.  Have you received and personally reviewed our Franchise Disclosure Document we provided to you?

Yes        No

4.  Do you understand all of the information contained in the Franchise Disclosure Document?

Yes        No

If “No”, what parts of the Franchise Disclosure Document do you not understand?  (Attach additional pages, if necessary.)

5.  Have you discussed the benefits and risks of operating a Franchised Business with an attorney, accountant or other professional advisor and do you understand those risks?

Yes        No

6.  Do you understand that the success or failure of your business will depend in large part upon your skills and abilities, competition from other businesses, interest rates, inflation, labor and supply costs, lease terms and other economic and business factors?

Yes        No

7.  Has any employee or other person speaking on our behalf made any statement or promise concerning the revenues, profits or operating costs of a Franchised Business that we or our franchisees operate?

Yes        No

8.  Has any employee or other person speaking on our behalf made any statement or promise concerning a Franchised Business that is contrary to, or different from, the information contained in the Franchise Disclosure Document?

Yes        No

9.  Has any employee or other person speaking on our behalf made any statement or promise concerning the likelihood of success that you should or might expect to achieve from operating a Franchised Business?

Yes        No

10.  Has any employee or other person speaking on our behalf made any statement, promise or agreement concerning the advertising, marketing, training, support service or assistance that we will furnish to you that is contrary to, or different from, the information contained in the Franchise Disclosure Document?

Yes        No

11.  If you have answered “Yes” to any of questions seven (7) through ten (10), please provide a full explanation of your answer in the following blank lines.  (Attach additional pages, if necessary, and refer to them below.)  If you have answered “No” to each of such questions, please leave the following lines blank.

12.  Do you understand that in all dealings with you, our officers, directors, employees and agents act only in a representative capacity and not in an individual capacity and such dealings are solely between you and us?

Yes        No

 

“Franchise Fees” and the New York Franchise Law

Wednesday, August 24th, 2011

The New York Franchise Law defines a franchise fee as any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay directly or indirectly for the right to enter into a business under a franchise agreement, or otherwise sell, resell or distribute goods, services, or franchises under such an agreement, including, but not limited to, any such payment for goods or services.  The NY Franchise Law also contains several exclusions to the franchise fee definition, but no exemptions pertain to the purchase/sale of equipment.  Rather, the exemptions to the NY law are nearly identical to the Maryland law.

The dollar threshold for a franchise fee under NY law is $500.

Like Maryland, the scope of the New York Franchise Law franchise fee definition is construed broadly.  For example, a one-time fee or a monthly payment during a four-year period, which was characterized as a lease, was ruled a franchise fee.

Threshold for a Franchise Fee Under the FTC Rule Is $500 Through The First Six Months

Wednesday, August 24th, 2011

A licensing or other relationship where the trademark and system/significant control prongs of the FTC Franchise Rule are met is excluded from the scope of the franchise regulation if the total required payments by the franchisee before and during the 6-month period after the business opens do not exceed $500. 

The required fee element captures all sources of revenue paid by a licensee to a licensor for the license. The element is deliberately expansive, encompassing lump sum, installment, fixed, fluctuating, up-front, and periodic payments for goods or services, however denominated, whether direct, indirect, hidden, or refundable. 

To avoid the FTC Rule franchise fee requirement, it is possible for a licensor to defer required payments exceeding $500 for at least six months, and as a result, not be deemed a franchise under the FTC Rule and federal law.  This remains true even if the licensee signs a nonnegotiable, secured promissory note (with no acceleration clause) promising to pay the money after six months.

The deferment option is not all-encompassing however.  While the FTC Rule permits this deferment of payment option, this is applicable only in those states that do not have individual, state specific franchise laws, since in those states such license transactions are governed by the FTC Rule.  There are upwards of 15 states across the country, including Maryland, Virginia, New York, California, and Illinois, which do have specific franchise laws, and which do not grant this deferment option.  As a result, deferment is not an option in these states.  Have your franchise attorney check the franchise law of each individual state before proceeding.

 

Types of Relationships Covered by Federal and State Franchise Laws. [Part 3]

Thursday, April 28th, 2011

The Payment Requirement.

 The last of the three definitional elements of a franchise covered by the FTC Franchise Rule is that purchasers of the business arrangement must be required to pay to the franchisor as a condition of obtaining a franchise or starting operations, a sum of at least $500 at any time prior to or within the first six months of the commencement of operations of the franchised business.

 Here is what the FTC Franchise Rule states on the “Required Payment” element, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf

As to what constitutes a payment, the term “payment” is intended to be read broadly, “capturing all sources of revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor, market its goods or services, and begin operation of the business. Often, required payments go beyond a simple franchisee fee, entailing other payments that the franchisee must pay to the franchisor or an affiliate by contract – including the franchise agreement or any companion contract. Required payments may include: initial franchise fee, rent, advertising assistance, equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase), training, security deposits, escrow deposits, non-refundable bookkeeping charges, promotional literature, equipment rental and continuing royalties on sales.  Payments which, by practical necessity, a franchisee must make to the franchisor or affiliate also count toward the required payment. A common example of a payment made by practical necessity is a charge for equipment that can only be obtained from the franchisor or its affiliate and no other source.”

How Does a Franchisor Prove Damages in Litigation Against a Franchisee?

Friday, July 9th, 2010

In representing franchisor clients against defaulting franchisees, it is imperative to give adequate thought to how the franchisor is going to prove its damages that resulted from a franchisee’s breach of the franchise agreement. When confronted with this issue, I most often utilize a financially competent representative of the franchisor to testify with regard to that amount of monetary damage suffered by the franchisor. The franchisor’s representative must be able to prove the damage by evaluating the franchisee’s financial statements, including revenues and/or profits, expenses, and royalties paid to the franchisor, and then determine what sums the franchisor would have earned either during and/or after the franchise term had it not been for the franchisee’s breach.

In order to testify convincingly and thoroughly, the franchisor’s representative must be able to analyze the franchisee’s financial numbers and draw a conclusion from such numbers. Therefore, a chief financial officer of a small franchisor, or an auditor or accountant of a larger franchisor, is an ideal representative in these instances, provided that the representative has been with the company long enough to be able to testify knowledgeably with regard to the details of the franchisor’s system.

Generally, a well-prepared franchisor representative will be permitted to testify as to the value or the projected profits of a franchised business provided the representative has a sufficient foundation for the analysis and opinion, including particular knowledge of the financial issues presented by virtue or his or her position in the franchisor company. This simply means that a franchisor representative may opine on the issue of lost profits where they know the franchisor and franchisee’s business and financial system intimately, and have the professional ability to analyze the franchisee’s financial statements.

To see how a franchisor SHOULD NOT approach the issue of proving its damages against a franchisee, see Lifewise Master Funding v. Telebank, 374 F.3d 917 (10th Cir. 2004), which in essence holds that a company’s witness as to damages must have personal knowledge of all items factored into his opinion in order for the opinion to be admissible. The court concluded that a business owner or executive may give “a straightforward opinion as to lost profits using conventional methods based on [the company’s] actual operating history.” However, because in this case the witness lacked personal knowledge of the factors used in the damages analysis, the opinion was inadmissible.

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.