Hey everyone, Giuseppe Grammatico here, your Franchise Guide! Welcome back to the Franchise Freedom Podcast. Today, we’re tackling a topic that comes up constantly and often causes a lot of anxiety for prospective franchisees: the Franchise Disclosure Document (FDD) and the Franchise Agreement.
Let’s be honest, legal documents can be intimidating. Hundreds of pages of dense language – it’s enough to make anyone’s head spin! That’s why I was thrilled to bring my good friend and expert franchise attorney, Kit Higgs of Kit Franchise Law, onto the show to demystify the process.
Before we dive in, remember, if you’re exploring franchise opportunities and need guidance navigating the complexities, I’m here to help. Visit ggthefranchiseguide.com to book a free consultation.
Now, let’s get into the crucial insights Kit shared about understanding the legal side of buying a franchise.
From Prosecutor to Franchise Law Insider: Kit’s Unique Journey
Kit’s path to becoming a franchise attorney wasn’t exactly conventional. He started his career as a prosecutor handling child abuse cases! A friend launching a franchise sales organization, St. Gregory Development, needed a lawyer. Initially hesitant due to his lack of specific franchise law experience, Kit eventually took the plunge based on mentorship advice.
His real “aha!” moment came when he became General Counsel for CycleBar, a burgeoning indoor cycling franchise. Kit explained:
“My first role as general counsel was to write the franchise disclosure document and the franchise agreement. Same documents that I review now. Right. I actually had to write… I needed to make sure I understood everything about it… Because at the end of the day. I knew that my name was gonna be on this document.”
This experience of drafting FDDs and franchise agreements from the franchisor’s side gave Kit invaluable insight into how these documents are constructed, why certain clauses exist, and how franchisors operate. This insider knowledge is what makes his perspective so valuable when reviewing documents for franchisees today.
Why You NEED a Franchise Attorney (Even If It Seems Non-Negotiable)
A common question I get is, “The franchisor says the agreement isn’t negotiable, so why bother paying an attorney to review it?” Kit addressed this head-on. While major changes are rare, the review process is critical for several reasons:
- Understanding Your Rights & Obligations: The primary goal isn’t necessarily negotiation, but understanding. An FDD review clarifies exactly what you’re signing, your responsibilities, the franchisor’s responsibilities, and potential risks before you’re locked into a 10-year contract.
- Identifying Red Flags & Unusual Terms: Kit’s extensive experience reviewing hundreds of FDDs allows him to quickly identify clauses that are outside industry norms (good or bad) or potential red flags that a prospective franchisee might miss. He mentioned seeing royalty rates as high as 40% – while unusual, it made sense within that specific business model, but it needed explanation.
- Peace of Mind: Investing in a franchise is a massive decision. Having an expert confirm you understand the legal commitments provides invaluable peace of mind.
- The “CliffNotes” Version: As Kit put it, he acts like the “CliffNotes” for the dense FDD, highlighting the most critical points and ensuring you focus on the right areas.
- Explaining the “Why”: Even if a clause isn’t negotiable, understanding why it’s there is important. A good franchisor should be able to explain the reasoning behind their terms. If they can’t, that itself might be a red flag.
The Myth of the “Non-Negotiable” Agreement (and Why You Should Still Ask)
Kit confirmed that most franchisors are reluctant to change their standard agreements to maintain consistency across the system. However, he still advises clients to ask for specific changes if there’s a strong reason. Why?
- The Small Chance of Success: “If you don’t ask it, you’re not the answer is gonna be no.” There’s always a small possibility, depending on the franchisor and the specific request (like a right of first refusal on an adjacent territory), that they might agree.
- Opportunity for Explanation: Asking forces the franchisor to explain why a certain clause exists, leading to better understanding for the franchisee.
The goal isn’t to redline the entire document but to clarify, understand, and address any major points of concern.
Kit’s FDD Review Process: Simple, Clear, and Comprehensive
Kit outlined his straightforward, three-step process for FDD reviews:
- Intro Call (15 mins, Zoom): Get to know the client, the franchise they’re considering, why they’re interested, and who else (spouse, partner) should be involved.
- Engagement & Document Submission: Kit sends an engagement letter outlining his flat fee ($2,395 for one franchise, $2,895 for multiples). The client signs electronically and sends back the FDD.
- Review Call (1.5 hours, Zoom): Kit shares his screen, goes through the FDD cover-to-cover, highlighting key areas, potential risks, unusual clauses, and questions to ask the franchisor. He uses Zoom’s AI for a note summary afterward.
He generally recommends scheduling the review before attending Discovery Day, arming the candidate with informed questions to ask the franchisor face-to-face.
Key Areas to Scrutinize in the FDD
While the entire FDD is important, Kit highlighted a few areas that warrant particular attention:
- Item 3 (Litigation) & Item 20 (Outlets/Transfers/Terminations): Don’t just look at litigation in isolation. Cross-reference it with transfer and termination data in Item 20. A high number of lawsuits combined with high turnover could signal systemic issues.
- Item 13 (Trademarks): Ensure the franchisor actually owns the trademark you’ll be licensing. Also, look for pending registrations, which might hint at future revenue streams or service expansions.
- Item 19 (Financial Performance Representations – FPRs): Understand that the level of detail varies wildly between franchisors. Some provide extensive data, others very little (especially emerging brands). Use this as a starting point, but rely heavily on franchisee validation calls to get real-world financial insights.
- Resale Terms: If buying an existing franchise, understand how the remaining term transfers and whether you’ll sign a new agreement under current terms.
Final Advice: Timing, Confidence, and Asking Questions
Kit emphasized that it’s never too late to engage an attorney, even if it’s right before signing. The goal is clarity and confidence.
“The last thing you want is a hesitant or reluctant buyer… they should feel confident. I made the right decision. I did everything that I needed to do before I bought into this, and I’m just gonna move forward and kick ass and take names. Right.”
Don’t let unanswered questions or legal jargon create fear or doubt. Get your questions answered by the franchisor and by a qualified franchise attorney.
Buying a franchise is a significant commitment. Understanding the legal framework through a thorough FDD review is a non-negotiable step in protecting your investment and setting yourself up for success.
Ready to take the next step in your franchise journey and ensure you understand the legal side?
- Connect with Kit Higgs: https://kitfranchiselaw.com/ or https://www.linkedin.com/in/kitfranchiselaw/
- Explore franchise opportunities: https://ggthefranchiseguide.com/right-fit
Fun Fact: Keep an eye out for Kit Higgs in the movie Ezra starring Robert DeNiro – you might just spot the back of his head playing a Maître D’! (The movie was originally titled Wise Guys during filming).
