Using franchise kits with FDD templates, franchise operations manual templates, fill-in-the-blank documents, etc. may seem like a cheap way to franchise a business. As with most things in life, you get what you pay (or don't pay) for.
More importantly, franchise kits, FDD templates, operations manuals, etc. create significant legal risk - a ticking legal time bomb just waiting to explode. Liability can run into several hundred thousand dollars just in a "small" case and a new niche - franchise litigation attorneys - is enjoying a lucrative practice as a result. The article below, authored by Kevin B. Murphy - Mr. Franchise - addresses these important topics and provides a more cost-effective way to do it right the first time.
Building a Solid Foundation To Avoid Ticking Legal Time Bombs
Franchise Kits, FDD Templates and Franchise Operations Manual - Question from AllExperts.com Copyright 2009, Kevin B. Murphy, B.S., M.B.A., J.D.
Subject:
Franchise Kits - FDD Templates, Franchise Operations Manual - Mr. Franchise Weighs In
Question:
Our company wants to franchise and we're thinking about buying a franchise kit that includes an FDD Template (that also includes a franchise agreement template) and a franchise operations manual template. We realize it will probably need to be adapted and reviewed by a franchise attorney (for the legal) and franchise consultant (for the manual). We figured it would lay the groundwork and save some money in the long run. What do you think?
STEP BACK, AND DO A FRANCHISE FEASIBILITY STUDY Before
investing in anything, I recommend your company take a couple steps
back and hire a franchise expert to determine if your business has what
it takes to be successful as a franchise model. Before undertaking the
expense and commitments it takes to enter the franchise industry, you
need to know if franchising is in the cards for your business or not. A
franchise feasibility study by an objective franchise expert (one who
doesn’t tell every client they’re franchise-able) is a solid
investment. If the results are positive, then proceed.
FRANCHISE KITS & FDD TEMPLATES – COST SAVINGS? The
use of Franchise Kits and FDD templates, etc. is not a recommended
approach, nor will it result in any cost-savings. For example, the FDD
contains 23 chapters of information, covering hundreds of topics and
potentially thousands of discrete disclosures, depending on the
particular industry and business involved. Doing it properly up front
will save you a ton of headaches and going to court later on. Franchise
litigation costs are incredible these days - you can drop a couple
hundred thousand in just a few months. If your company uses an
off-the-shelf FDD template, be prepared to absorb these kinds of
litigation costs down the road. The seemingly inexpensive FDD template
ends up being one of the most costly mistakes you'll ever make.
I’ve
been drafting and reviewing FDD’s (formerly called UFOC’s) for 29 years
now. If someone gives me a draft or template to work from, it actually
takes more time to review the template compared to doing the document
from scratch. That’s because of the need to ensure all the mandated
disclosures are there, in a manner that’s true, complete and not
misleading, and that they are consistent with all provisions in the
franchise agreement. This checking and review process, going back and
forth between template documents and disclosure regulations, adds
another significant time-consuming component compared to doing it from
scratch, using my own work product.
What unfortunately happens
with FDD templates is they are either used “as is” or are reviewed by a
general practice attorney on the cheap who is not a franchise attorney.
I've seen FDD templates going for $150 by
companies who state (without further explanation or detail) they are
"attorney approved." The end result is a
document that is literally a ticking franchise litigation time bomb,
giving franchise buyers a springboard to cancel their franchise
contracts and sue the franchise company for damages. I see FDD
templates and franchise kits in another capacity – as a consulting and
testifying franchise expert. Franchise litigation legal costs defending
a case can easily exceed $200,000 in just a couple months these days
and is definitely not the place your company ever wants to be.
TEMPLATE FRANCHISE AGREEMENTS Now,
let’s talk about “draft” or template franchise agreements. Same
problems. First of all, the contract must be structured from a good
legal as well as business perspective. If it’s overly tight or unfair
(legal issues) and doesn’t achieve a delicate balance (business
issues), there will be disgruntled franchise owner problems down the
road, believe me – I see it all the time. You won’t find a franchise
agreement meeting these twin standards in a draft or template version.
There's a lot of planning and thought that needs to go into it, based
on the company and competition. Second, because numerous franchise
agreement provisions must be cross-referenced under various disclosure
topics and tables within the FDD, if I’m working with a draft franchise
agreement that I’m not familiar with, this presents yet another
challenge. The end result is substantially more billing time for the
client - good for me, but not for my client.
TEMPLATE FRANCHISE OPERATIONS MANUALS Using
template operations manuals only makes sense as a starting point. If
you’ve never written an operations manual before, seeing one can give
you a flavor for topics or chapters. If you can view a number of
manuals, then you can learn different presentation and drafting styles.
With
a franchise operations manual template, I don’t know how much detail
you will learn. One thing is clear - you definitely won’t see different
presentations and drafting styles. There’s also another, more serious
problem with these templates – legal risk. As a consulting and
testifying franchise expert I see operations manuals drafted by
franchise consultants (and usually originating from a franchise kit
they came across at some point in their career where hopefully all
instances of “burgers” are searched and replaced with “tax returns,"
for example). The end result is a mediocre product. A more important
problem is these manuals contain inappropriate topics or chapters that
create long-term legal risk. That’s why I’ve developed a three-step
process so companies can write their own, professional operations
manual. It’s a relatively easy task, and there’s a great article about
this topic referenced below.
BOTTOM LINE ON FRANCHISE KITS Good
idea to try and save your company some money, but using a franchise kit
with “templates” won’t accomplish this goal. In fact, your company will
end up spending a lot more this way to have it done right.
THE BEST PRACTICE APPROACH TO REDUCING TOTAL FRANCHISE DEVELOPMENT COSTS If you’re looking to save your company money, as in tens of thousands of dollars, a much better approach is to use a firm that:
(1)
can produce the legal documentation (FDD, franchise agreement, etc.)
tailored for your business at a reasonable, fixed contract cost of
about $30,000;
(2) the pricing includes strategic franchise
planning by a seasoned franchise attorney MBA, so a separate franchise
consultant charging $20,000 or more is not required for the business
issues;
(3) and also includes helping your company produce
their own franchise operations manual, another relatively easy task
franchise consultants charge $20,000 or so to write;
(4) is
available to train your franchise management team in critical areas
like adopting the proper franchise organizational structure, franchise
marketing, interviewing prospective franchise buyers, selling and
documenting franchise sales, effective franchise training and start-up,
franchise support and implementing a franchise advisory council; and
(5)
is available for ongoing advice and consultation, especially during the
franchise marketing phase when franchise candidates are interviewed and
franchises are sold.
There are some good articles on the Franchise Foundations website about these topics at:
Copyright 2010, Franchise Foundations, a San Francisco professional law corporation. The information you obtain at this franchise website is not, nor is it intended to be, franchise legal advice. You should always consult a franchise attorney - franchise lawyer for individual advice regarding your own situation and franchise disclosure documents. Use experienced FranchiseLawyers and FranchiseAttorneys for advice with your franchise legal documents and needs. Use an experienced MBA Franchise Expert for help with franchise consulting issues.
Last Franchise Website Update: April 8, 2010 Singapore
