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 in just a “small” case, and a $1 million or more in bigger cases. A new niche – consisting of franchise litigation attorneys – is enjoying a lucrative practice as a result. This is not something you will ever hear from companies that hawk franchise kits.
Another variant of franchise kits is using another company’s FDD and substituing information. Besides the inherent failing to adequately disclose legal risk, which is almost always the case, there’s a much bigger problem. It infringes on their copyright (whether a copyright notice is posted or not). Statutory damages (i.e. damages without having to prove anything other than the work has been copied) for copyright infringement are $150,000 per infringement for each time it is distributed to someone.
The article below, authored by Kevin B. Murphy, Mr. Franchise, a testifying franchise expert who sees where the bullets come from in franchise litigation, shares his experience and provides a cost-effective way to do it right the first time.
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?
Answer: 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.
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.
Another variant on using franchise kits is using someone else’s FDD. Besides the inherent failing to adequately disclose legal risk, which is almost always the case, there’s also a much bigger problem. It infringes on their copyright of various things, like the franchise agreement, etc. (whether a copyright notice is posted or not). Statutory damages for copyright infringement are $150,000 per infringement for each time it is distributed to someone.
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.
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.
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:
Developing a cost-savings franchise development budget
Writing your own franchise operations manual
Evaluating franchise attorneys and franchise consultants
Good luck, and if you have any specific questions, contact me through the Franchise Foundations website link below.
Kevin B. Murphy, B.S., M.B.A., J.D.