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The FDD is required to be written in "plain English". What exactly does plain English mean? Section 436.1 of the FTC's Franchise Rule (16 C.F.R. §436.1(o)) states that "Plain English means the organization of information and language usage understandable by a person unfamiliar with the franchise business. It incorporates short sentences; definite, concrete, everyday language; active voice; and tabular presentation of information, where possible. It avoids legal jargon, highly technical business terms, and multiple negatives." As you can see, plain English is the opposite of legalese. Read more »
What are the key provisions of the franchise documents that every franchisee should know? Every prospective franchisee should read through all 23 items of the franchise disclosure document (FDD), but pay particular attention to the following items:
Item 1 of the FDD discusses the background of the company, its parents and affiliates. It also is the area that discloses the competition and regulations in the industry.
Item 3 of the FDD discloses the material litigation in which the franchisor is involved. A prospective franchisee should be wary if there are many suits against the franchisor by the franchisees or many suits by the franchisor against its franchisees.
Items 5, 6 & 7 of the FDD are the financial disclosures that every prospective franchisee should read carefully, including the footnotes to each item. These items disclose the obligations of the franchisee for the upfront fees (Item 5), on-going fees (Item 6) and the likely costs the prospective franchisee can expect to open the business (Item 7 chart). Read more »
What type of due diligence, investigation or validation should a prospective franchisee perform? A prospective franchisee, someone looking to invest in a franchise, should learn as much as possible about the business and franchise opportunity prior to signing any contract or paying any money to the franchisor. First and foremost, read the 23 items of the FDD. This document is supposed to be written in "plain English" for a prospective franchisee's review. Pay particular attention to Items 5, 6 & 7, the financial disclosures. In addition, review Item 20 to learn about the system and its anticipated growth. Read more »
What do you need to know before you invest in a franchise? I always tell my prospective franchisee clients that they should find out as much as possible about the franchise and the business. The following are some suggestions on questions to ask the franchisor and things to learn about the franchise before you invest in a franchise opportunity: Read more »
What do you need to know to create a franchise of your business from a legal perspective? You have a successful business concept. You may have even had inquiries regarding buying a franchise of the business concept. To franchise your business you will need a federally registered trademark, compliance with the FTCs requirement of a disclosure document (FDD) and legal compliance with certain state requirements. This post will discuss the legal aspects of franchising your business.
First, you must have a federally registered (or at least applied for) trademark with the US Patent and Trademark Office. Registration of your name and logo will protect the name and logo from others attempting to copy your name and/or logo. However, you should know that anyone using the name or logo prior to your use, has priority rights to that name and/or logo for their marketing area. The trademark and other intellectual property (trade dress, etc.) is the cornerstone of what someone will be licensing from you when they buy a franchise from you. Read more »