International Law

How Can Your Research Your Franchisor? Sneaky Lawyer Trick to Follow

Mark Leonard, who styles himself as the Franchise Mentor, proposes the following checklist when researching a franchise opportunity.

I am going to reprint the entire list, because it demonstrates two things. First, Mark has some good ideas. But, second, Mark has no idea about the effect of the FTC Rule on disclosures made outside the FDD or UFOC.

Here is Mark's list.

"1. How many stores does the franchisor have in its network? How many are franchisee-owned and how many are company-owned?

2. How many new franchisee-owned stores have opened up in each of the last 5 years?

3. How many new franchisor-owned stores have opened up in each of the last 5 years?

4. How many franchisees have sold their stores, or shut down, in each of the last 5 years?

5. What has been the AUV (average unit volume) for each of the last 5 years? Even better, knock off the results of the top 5-10% of stores. All franchises have super-star stores that do great volume. You’re probably not going to get one of these. Therefore, by knocking off the cream, you can get a more realistic expectation of your results.

6. What has been the trend in the average ticket for each of the last 5 years?

7. List the 5 closest competitors to your potential franchise. Compare your franchisor’s growth rate to the growth rate of the competitors.

8. Get the franchisor to articulate their growth plans both nationally and in your area.

9. Given the national and local trend knowledge you now have, is the franchisor’s growth rate expectation realistic, in your opinion?

10. What significant developments have affected the franchisor in the last 3 years, such as executive personnel changes, major financing events, litigation, major change in operations, major change in marketing? Have any major changes been announced but not yet implemented?

11. Is the franchise owned by a large corporation or private equity firm that has plans to “flip” the organization, and if so, can you project how that might impact your results."

Answers to questions 1-4 are in the FDD or UFOC.

Answers to questions 5 and 6 may not be in the FDD, depending upon whether or not the franchise makes an earnings claim in Item 19.

Answers to questions 7-11 are very unlikely to be be in the FDD or UFOC.

But they are all good questions. So what is the significance of good questions that are not the in FDD or UFOC? Well, the usual integration/waiver clause in a franchise agreement will block you from being able to rely upon the answers you received to questions that were not in the FDD or UFOC.

You simply cannot rely upon information not provided to you in the UFOC unless your attorney amends the standard franchise agreement.

And there is no point in asking these questions, if you cannot rely upon them. Sneaky lawyer trick, eh.

Full post as published by Misleading Advertising Law on June 03, 2008 (boomark / email).