You have found a franchise that appears promising. You like the brand, the business model, and the people you have met. The franchisor has sent you a Franchise Disclosure Document (FDD) and franchise agreement, and the sales process is moving quickly.
Before you sign, you need to understand what the documents require, what risks you are assuming, and how difficult it may be to protect or recover your investment if the business does not perform as expected.
A franchise investment involves more than the initial franchise fee. You may be committing your savings, guaranteeing a lease or business loan, accepting years of royalty obligations, and agreeing to substantial restrictions on how you operate, sell, or leave the business.
Rush Nigut is a franchise attorney with more than 30 years of business law experience. He provides flat fee FDD and franchise agreement reviews to help prospective franchisees identify risks, understand their obligations, evaluate possible negotiation points, and make an informed decision before signing.
Based in West Des Moines, Iowa, Rush advises franchise buyers and owners in matters involving businesses and franchise systems across the country when permitted by applicable professional rules. When another state’s law requires local advice or representation, he works with qualified local counsel as appropriate.
To discuss a franchise review and request a flat fee quote, contact Rush at 515-274-1450.
Why should you have a franchise attorney review the FDD and franchise agreement?
The franchisor’s sales presentation explains the opportunity. The franchise agreement explains the obligations.
Most franchise agreements are written to protect the franchisor and the franchise system. They commonly give the franchisor broad authority over operations, approved products and suppliers, technology, advertising, transfers, renewals, defaults, and termination.
The agreement may require you to:
- Pay royalties even when the business is losing money
- Contribute to national and local advertising programs
- Purchase products, equipment, or technology from required sources
- Remodel or upgrade the location when system standards change
- Personally guarantee franchise, lease, or financing obligations
- Obtain the franchisor’s approval before selling the business
- Resolve disputes in another state
- Stop operating a competing business after the franchise ends
A franchise attorney helps you understand how these provisions may affect your investment before you are legally bound by them.
What is a Franchise Disclosure Document?
The Franchise Disclosure Document, commonly called the FDD, contains 23 categories of information about the franchisor and the franchise opportunity.
The disclosures address the franchisor’s business history, litigation, bankruptcy, fees, estimated initial investment, required suppliers, franchisor support, territory, financial performance representations, franchisee turnover, financial statements, and the agreements you will be asked to sign.
Under the Federal Trade Commission’s Franchise Rule, a prospective franchisee generally must receive the FDD at least 14 calendar days before signing a binding agreement or paying money to the franchisor or one of its affiliates in connection with the proposed franchise sale.
The FDD provides important information, but it does not tell you whether the franchise is a good investment. No government agency has verified the business opportunity or guaranteed that you will succeed.
A careful review should identify what the FDD reveals, what questions remain unanswered, and which issues require additional investigation.
What does a franchise attorney look for in an FDD?
Rush reviews the FDD for legal, financial, and operational issues that could affect the franchisee.
The franchisor’s history
How long has the franchisor operated the concept? Is the system established, rapidly expanding, or relatively untested? Does management have experience operating the underlying business, or is its primary experience selling franchises?
Litigation and bankruptcy
Has the franchisor been involved in disputes with franchisees? Do the disclosed cases suggest recurring problems involving earnings claims, support, royalties, suppliers, defaults, transfers, or termination?
Initial and continuing fees
What will you pay to open and operate the franchise? In addition to the franchise fee and royalties, are there advertising, technology, training, renewal, transfer, audit, conference, or other charges?
Estimated initial investment
Does the Item 7 estimate appear to include enough working capital? What expenses could exceed the disclosed range? How long can the business operate if revenue develops more slowly than expected?
Required suppliers and purchases
Must you purchase products, services, equipment, or technology from the franchisor, its affiliates, or designated suppliers? Does the franchisor receive revenue or other benefits from those purchases?
Franchisor support
What training, marketing, site selection, technology, and ongoing operational support is the franchisor contractually required to provide? Do the documents promise meaningful assistance, or merely give the franchisor discretion to determine the support it will offer?
Territory rights
Is the territory exclusive or protected? Can the franchisor compete through other locations, websites, alternative brands, grocery stores, delivery services, or other distribution channels?
Financial performance representations
Does Item 19 provide revenue or earnings information? Which locations are included? Are the numbers averages or medians? What assumptions should be independently tested by an accountant?
Franchisee turnover
How many locations have opened, closed, transferred, terminated, or declined to renew? What do those changes suggest about the health and stability of the system?
Franchisor financial condition
Do the financial statements indicate that the franchisor has sufficient resources to support its franchisees and meet its obligations?
The objective is not simply to summarize the FDD. It is to determine which disclosures matter to your decision and what additional questions you should ask.
What is included in Rush Nigut’s flat fee franchise review?
Rush’s flat fee franchise review includes a detailed analysis of the FDD, proposed franchise agreement, and related agreements provided for review.
The review focuses on the provisions that most directly affect the franchisee’s risk, control, and ability to protect the investment. These commonly include:
- Fees and continuing financial obligations
- Territory rights and competition from other channels
- Personal guarantees
- Required purchases and approved suppliers
- Advertising obligations
- Training and franchisor support
- Operating standards and required upgrades
- Default and termination provisions
- Cure periods
- Renewal rights
- Transfer restrictions and rights of first refusal
- Post termination obligations and noncompetition provisions
- Indemnification and limitation of liability
- Governing law and dispute resolution
- Attorneys’ fees and litigation expenses
Rush provides a detailed written report explaining the most important provisions, the risks they create, and the issues that may deserve further investigation or negotiation. He then discusses the findings with the prospective franchisee and answers questions about the documents and proposed relationship.
A flat fee is quoted before the review begins.
Can a franchise agreement be negotiated?
Franchise agreements are often more negotiable than buyers assume, although the extent of negotiation depends on the franchisor, the maturity of the system, the number of units involved, the proposed market, and the buyer’s leverage.
Most franchisors will not rewrite the entire agreement. They may, however, consider focused requests involving territory, development deadlines, personal guarantees, transfer rights, cure periods, required upgrades, opening obligations, or certain fees.
Effective negotiation begins by identifying the few provisions that create the greatest risk. Rush helps clients distinguish between issues that are important and provisions that are unlikely to materially affect the investment.
The best time to raise these issues is before signing, while the prospective franchisee still has leverage.
Learn how smart franchise owners negotiate before problems arise.
Should you also consult an accountant before buying a franchise?
Yes. A franchise attorney and an accountant perform different but complementary roles.
The franchise attorney evaluates the FDD, franchise agreement, legal obligations, personal guarantees, termination rights, transfer restrictions, and other contractual risks.
An experienced accountant should test the financial model. The accountant can evaluate projected revenue, startup expenses, working capital, labor, rent, royalties, debt service, taxes, owner compensation, cash flow, and the sales required to reach break even.
The legal documents may explain what you must pay. The accountant helps determine whether the business can afford to pay it.
A thorough franchise evaluation generally requires both legal and financial advice.
What questions should you ask before buying a franchise?
Before signing, a prospective franchisee should ask:
- How much money will I really need to open and survive the early operating period?
- What do current and former franchisees say about profitability and support?
- How many locations have closed, transferred, or failed to renew?
- What sales level must the business achieve to break even?
- Does the Item 19 financial performance representation support the franchisor’s sales presentation?
- What happens if revenue is lower or expenses are higher than projected?
- What control does the franchisor retain over prices, suppliers, technology, and operations?
- Is my territory meaningfully protected?
- Can I sell the franchise, and must the franchisor approve the buyer?
- What happens if the franchise does not succeed and I want to leave?
- Which obligations continue after the franchise agreement ends?
- Am I personally guaranteeing the obligations?
A good franchise review does not merely answer questions about the documents. It helps you identify the questions you did not know to ask.
Franchise law resources for prospective franchisees
The following resources provide additional guidance for evaluating a franchise opportunity and understanding the franchise relationship.
What mistakes should you avoid before signing?
Prospective franchisees frequently underestimate working capital, rely too heavily on the franchisor’s preferred references, and focus on the brand rather than the legal relationship.
Read about the 10 biggest mistakes franchise buyers make before signing.
What hidden risks may be buried in the franchise agreement?
Royalties, required upgrades, personal guarantees, transfer restrictions, default provisions, and post termination obligations can create risks that are not emphasized during the sales process.
Which franchise agreement provisions matter most?
Some provisions have a much greater effect on the value, operation, and future sale of the business than others.
Review the franchise agreement provisions that matter most.
What does a franchise default notice mean?
A default notice may begin a short cure period and place the franchise agreement, business, and personal investment at risk.
Learn what a franchise default notice means and what to do next.
What options exist when a franchise is no longer working?
A struggling franchisee may have options beyond continuing to lose money or immediately filing a lawsuit. The possible paths may include a cure, sale, transfer, negotiated exit, restructuring, or litigation.
Explore your options when you want to exit a franchise.
Can Rush help after you purchase the franchise?
Yes. Rush advises franchise owners on contract questions, business formation, employment matters, lease issues, ownership disputes, defaults, renewals, transfers, purchases and sales, and disagreements with franchisors.
He frequently serves as outside general counsel for business and franchise owners who need ongoing legal guidance without employing in house counsel.
When a dispute arises, Rush evaluates both the legal claims and the underlying business objectives. The goal is not always to file a lawsuit. It may be to preserve the business, resolve a default, complete a sale, negotiate an orderly exit, or reach another practical resolution.
Does Rush represent franchisors?
Rush’s experience includes representing national franchisors in business and litigation matters in Iowa. He also has advised business owners interested in developing franchise systems.
This experience provides additional perspective when advising franchisees because Rush understands the business and legal concerns that influence decisions on both sides of the franchise relationship.
Can Rush form the business entity that will own the franchise?
Yes. Rush assists Iowa franchise buyers with forming limited liability companies and other business entities, preparing organizational documents, and addressing ownership and governance issues.
The legal structure should also be reviewed with an accountant because entity selection can affect taxes, compensation, financing, and distributions.
Additional information is available on the Iowa incorporation and LLC formation services page.
About franchise attorney Rush Nigut
His franchise experience includes financial services, home based businesses, restaurants, fitness centers, hair salons, tutoring services, dry cleaning businesses, real estate concepts, automotive businesses, postal and package services, retail operations, and many other service based franchises.
Rush helps clients understand the legal and business realities behind a franchise opportunity. His role is not to sell the franchise or validate the buyer’s enthusiasm. It is to provide clear, practical advice so the client can make an informed decision.
Rush is licensed to practice law in Iowa. His ability to provide legal services in matters involving other jurisdictions depends on the circumstances and applicable professional rules. Local counsel may be engaged when appropriate.
How do you get started with a franchise review?
Begin the legal review before signing the franchise agreement, paying the franchise fee, committing to a location, or assuming other substantial obligations.
Contact franchise attorney Rush Nigut at 515-274-1450 to discuss the proposed franchise and request a flat fee quote.
The earlier the documents are reviewed, the more opportunity you may have to investigate concerns, consult with an accountant, negotiate important provisions, and decide whether the franchise is right for you.