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Franchise Law – 23 Items of the Franchise Disclosure Document (Part 1 of 2)

Business Litigation Attorney EncinoFranchise & Business Litigation Attorney

 

by David Gurnick
818.907.3285

 

Since 1979, any company wishing to offer and sell franchises in the United States has been required to prepare and present a written disclosure document to prospective franchisees.

The document provides extensive information about the company that offers and sells franchises, and the terms of the franchise being offered. Over time, the rules have changed concerning the name and precise contents of the document. But generally, the overall categories of information to be disclosed have remained the same. Today, it is called a “Franchise Disclosure Document,” or an “FDD.”

Here are the first 12 of the 23 categories of information that a franchisor's FDD is required to contain.

1. The Franchisor, It’s Predecessors and Affiliates.

This category provides a general introduction to the franchisor and the business. It describes the nature of the business, the market for the services or merchandise to be sold, particular laws the franchisee must comply with, the franchisor’s history, and information about companies affiliated with the franchisor.

2. Business Experience.

The FDD identifies the board of directors, officers and other key management personnel of the franchisor, and describes their current positions and employment histories, going back five years. With this information a potential franchisee can assess the business experience of the franchisor’s management in relation to the business of the franchise.

3. Litigation.

Litigation and arbitrations brought against the franchisor during the last 10 years, and their outcomes are described here. This category also provides summary information on suits and arbitrations that the franchisor brought against its franchisees. This information can be a useful tool in assessing the quality of relations between the franchisor and franchisees, and the types of problems that have occurred, that resulted in litigation.

But it is only a partial tool. The existence of litigation and claims does not automatically mean franchisor-franchisee relations are generally bad. The cases that were brought could be aberrations. The absence of litigation or arbitration does not mean relations are good. There could be disputes that did not result in litigation.

4. Bankruptcy

Bankruptcies of the franchisor or management during the past ten years are covered here. As with litigation, the existence of a bankruptcy or two among management does not, by itself, mean the franchise should be avoided.

Many individual managers, like other people, have been forced into bankruptcy for extraneous reasons having little to do with the franchise, such as a spouse or relative experiencing costly health issues. On the other hand, where key management has had one or more bankruptcies, it may be fair to ask why, and evaluate if they are individuals who have problems managing financial affairs.

5. Initial Franchise Fee

This information category discloses all amounts the franchisee must pay to the franchisor before the franchise starts operating.

6. Other Fees

Other Fees include all amounts the franchisee must pay to the franchisor after the franchise starts operating. This can be a particularly useful disclosure as it assists the potential franchisee in understanding the various fees and charges that will be imposed.

7. Initial Investment

Food FranchiseThe Initial Investment appears in a table that shows, for each category of expense that a franchisee will incur, a high-low range and an overall high-low range for the total investment to establish and start operating the franchise. This disclosure item can be particularly useful for a franchisee in determining affordability of and budgeting a potential franchise investment.

8. Restrictions On Sources Of Products And Services

Franchise systems often set restrictions on who the franchisee may obtain supplies, inventory and services from. Franchisors do this as a quality control measure, and to assure uniformity among the various outlets in their franchise system.

This category discloses the restrictions that the franchisee will be subject to in obtaining merchandise and services for the franchise.

9. Franchisee’s Obligations

The obligations table outlines 24 categories of obligations the franchisee will be required to comply with, and identifies particular sections in the Franchise Agreement, and/or in other agreements to be entered into, that concern that type of obligation. Rather than state the substantive obligation, this disclosure table points the franchisee to the statement of the obligation in the written agreement to be entered into.

10. Financing

Many franchisors offer to assist their franchisee with financing the franchise investment, either by accepting a promissory note for some of the investment obligation, or by making arrangements with third party lenders. This disclosure item provides a table summarizing key aspects of any financing arrangements that the franchisor is willing to make.

11. Franchisor’s Obligations

This disclosure category is one of the most extensive in the FDD. It summarizes assistance the franchisor has promised to provide before the franchise starts operation, and ongoing assistance to be provided after the start of operation.

Franchisors usually offer a training program in the operation of the franchised business. This category details the training, in a table that lists subjects, hours devoted to each, and whether that portion of the program is conducted in a classroom or on-the-job setting.

Other subjects addressed in this disclosure item include information on the franchisor’s advertising program, existence of advertising cooperatives, required participation in an advertising fund, details of any electronic point-of sale system the franchisee must purchase and the table of contents of the franchisor’s operating manual.

12. Territory.

Franchisees often want, and receive, a promise of exclusivity in a geographic area or market sector. Their franchisor promises not to establish another franchise within a stated area or market sector. This disclosure describes any territory exclusivity for the franchisee, how it is determined, and the circumstances in which exclusive territory may be modified.

In my next blog, we’ll discuss the final items franchisors must divulge in Franchise Law - The FDD Part 2 of 2. In the meantime, please contact me if you have any questions regarding franchise law, the Franchise Disclosure Document, or any of the points above.

David Gurnick is a Certified Specialist in Franchise and Distribution Law, as specified by the State Bar of California’s Board of Legal Specialization. E-mail him at dgurnick@lewitthackman.com

 

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Thursday
Nov102011

Before You Buy a Franchise | Franchise Information for the Uninitiated

 

Franchise Agreement LawyerState Bar Certified Specialist, Franchise & Distribution Lawby Tal Grinblat
818.907.3284

 

When you buy a franchise, you buy more than just the right to sell certain services and/or products. You buy name recognition, a marketing plan and the expertise of business professionals who hopefully have track records for competing in the marketplace.

There’s a certain amount of security in buying a franchise that has name recognition you don’t necessarily get when launching a brand new business concept – and that level of comfort can be especially attractive to new business owners.

However, buying a franchise can also involve significant financial costs and risks, so it’s important to do a thorough investigation before buying and signing any franchise agreement.

Franchise Lawyer Tips

Here are some things to consider:

1. Franchise Costs

You’ll want to consider the total cost of getting into the franchise, which involves more than the initial franchise fee. Before pulling the trigger, a prospect needs to consider all the following fees and costs of buying a franchise, such as:

▪ Franchise Fee – Depending on the franchise system involved, this fee could be several thousand to hundreds of thousands of dollars.

▪ Real Estate – You will need to consider whether to buy or lease the site where your franchise will operate. Some franchisors will have strict specifications regarding the location of your new business.

▪ Build Out Costs, including Equipment — Not all franchises are equal in terms of build out costs.

Some systems require a relatively small initial outlay for build out costs (costs for building and equipping the franchise), if the franchise is a cart in a mall or a department within another store, for example.

Other systems can have significant costs which you will need to incur for constructing the premises following the franchisor’s criteria and equipping the franchise.

In addition, some systems require the purchase of proprietary systems, equipment and software, not readily available elsewhere which can increase the start up costs, sometimes fairly dramatically. Others do not. So it’s important to compare these differences among competitors.

▪ Royalty Payments – You’ll need to pay royalty fees for the use of the franchisor’s name and system. These payments may be a flat monthly fee or based on gross revenue by week or by month. These fees can range from three percent or more than ten percent off the top. You’ll need to study the franchise program to assess whether you can make a decent profit after royalties are deducted.

▪ Advertising Fee Contributions – Many franchise systems require franchisees to contribute to a national or regional advertising fund (in addition to local advertising requirements). These fees are used to promote the franchise system as a whole. This type of advertising can build brand recognition system-wide.

However, franchisors usually have wide discretion to decide the type of advertising to be used (Internet, broadcast, billboard) and how to direct the advertising—whether to focus on areas where there is a greater concentration of franchisees, etc. So these expenditures may not benefit all franchisees proportionately and franchisees generally have very little say on how the franchise system spends this money.

2. Franchise Choices

 

In conducting your due diligence, how do you find out which franchise is right for you? First, you should decide on a particular industry based on the type of work you like to do. Then determine how much time you are willing to commit to that work. Do you want a franchise with a set, 9-5 schedule? Are you interested in food service, graphic design, or auto repair?

There are many ways to choose the right franchise for you. Three methods for doing so are:

▪ Getting Recommendations from Existing Franchisees – One of the best resources to determine whether a concept is a good franchise opportunity includes speaking to existing franchisees. An existing franchisee can provide information about the franchisor’s principals (are they easy to deal with), whether the franchisee recommends the franchise system and the potential sales and revenue a franchisee can expect to derive.

▪ Attending Franchise Expositions – There are various franchise trade shows, such as The West Coast Franchise Expo in Los Angeles. These are great forums for discovering the wide variety of franchise opportunities available.

▪ Consulting Franchise Brokers – A broker can match your interests, resources and needs to available franchise opportunities. However, most brokers work on commission and may try to match you to the franchises that require larger franchise fees.

Other brokers may work with a limited number of franchisors, so they may offer you fewer choices than brokers that have a wider network of referral opportunities. It is therefore important to conduct due diligence on any broker you speak to.

3. Franchise Disclosure Documents

The Federal Trade Commission requires a franchisor to provide you with a disclosure document (usually referred to as an FDD) at least 14 days before you sign a franchise agreement or pay any money to the franchisor.

▪ Business Background – of the franchise company and its officers, directors and managers, special laws that affect the franchise, required permits to operate the franchise and general description of the competition.

▪ Litigation History – material litigation, administrative cases, government orders and injunctions affecting the franchisor and its principals in the last 10 years.

▪ Bankruptcy – recent bankruptcies filed by the franchisor and its principals in the last 10 years.

▪ Franchise Costs and Initial Investment – initial and ongoing royalties, advertising fees, and all other payments the franchisee must make both to enter the franchise and during the franchise relationship. The franchisor will also provide information on the expected initial investment to enter the franchise.

▪ Training – provided by the franchisor before start of the franchise.

▪ Exclusivity – provided by the franchisor from other franchisor owned and franchised outlets.

▪ Information – on the number of franchised and company owned outlets, terminations, non-renewals, etc. – the FDD will provide information on current and former franchisees, number of franchisee terminations, cancellations and non-renewals in the last three years and other useful information to find out whether the franchise system is stable or rife with turnover.

▪ Restrictions imposed on franchisees – in terms of supplies, services, sales, products offered, etc.

▪ Renewal, Transfer Obligations and Post Termination Obligations – Conditions imposed by the franchisor for renewing the franchise, selling or assigning the franchise to another; and any post termination obligations, including the existence of any non-compete requirements.

▪ Audited Financial Statements – the FDD will include audited financial statements going back 3 years to enable the franchisee to assess how the franchisor is doing financially, whether the franchisor is making or losing money and whether they are financially stable or in decline. The audit report will also indicate whether the auditor believes the franchise company is showing signs of trouble.

Other than the above, there are many sources of information available through the Federal Trade Commission, the California Department of Corporations and other sites. So be sure to do your due diligence before jumping in.

The most important consideration before buying a franchise though, is protecting yourself financially. Be sure to have your accountant and franchise attorney look over the franchise documents, including the terms of the agreements, financial statements and the franchisor’s business structure, before you sign any agreements to ensure it’s the right fit for you.

Tal Grinblat is a Certified Specialist in Franchise and Distribution Law, as specified by the State Bar of California. For more information, call Mr. Grinblat at 818.990.2120.

 

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Friday
Nov042011

A Car Accident in Los Angeles – Three Steps You Must Take

Injury AttorneyAccident Attorney 

 

by David B. Bobrosky

(818) 907-3254

 

When you have a car accident in Los Angeles (or anywhere else in the world) it’s often difficult to think clearly about the important steps you need to take to keep you, passengers and other drivers safe immediately afterwards.

 

First, according to California law, you must stop immediately after the accident. If not, you could be charged with a hit and run.

Once stopped, you’ll need to do three things.

First, your basic survival instincts should remind you to get off the road and to stay out of harm’s way. Rubberneckers are prone to causing serious, secondary accidents. We once represented a woman who was struck by a big rig while she was standing outside her car after a minor accident.

The second step is to check to see if anyone has been injured and to call for help if someone did experience anything from minor to extensive injuries, or if they seem to be in a state of shock. My advice is to call the police after every accident. But you’ll find that they usually will not respond unless you tell them someone is injured or the other party is not cooperating in the exchange of information. 

The third step, which often gets lost in the immediacy of the situation, is to document everything that happened.

Steps one and two protect you in the “here and now”. Step three will help you later, particularly in the case of future litigation, financial claims, and/or developing injuries.

California Accident Law – Handle the Legal Requirements First

 

If you’re involved in a car accident in California, you must present your driver’s license, vehicle registration, proof of insurance and current address to the other drivers involved in the accident.

If you don’t have one of our brochures available but you have a smart phone with a decent camera AND if the other drivers will allow you to do this, take photos of the other drivers’ information, ensure all of the text is in focus, and immediately e-mail the photo to yourself so it won’t get lost. Otherwise, grab pen and paper and start writing.

Accident Photos Speak a Thousand Words

 

Once you have everyone’s information, start taking photos of the scene. Get wide shots of the area (include street signs, stop signs, traffic lights, etc.) as well as close up images of anything damaged (yours and theirs), and license plates of the cars involved.

Try to get pictures of the cars before they are moved, if you can, but do not put yourself or others in danger in an attempt to get photos.

Accident Avoidance: Stay Safe When Driving

 

The ideal situation when driving is to do everything you can to avoid a car accident in the first place. You can do this by staying constantly aware. That means no eating, drinking or applying cosmetics while driving, and no using your cell phone while driving. In other words, no driving while distracted, or DWD.

It also means “driving defensively,” especially when you spot others “multi-tasking” on the road.

Sometimes though, no matter how careful you are, things just happen. If you’re involved in a Los Angeles car accident,

1. Get yourself and others to safety.
2. Check for injuries sustained during the accident, and potential dangers arising at the accident scene.
3. Document everything.

You can reach David B. Bobrosky in our Personal Injury Practice Group by dialing 818.990.2120.

 

 
Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

Friday
Oct282011

Motorcycle Safety | Ride a Hog? Get your Harley Davidson Brake Light Checked

Motorcycle Accident Attorney

 

by Andrew L. Shapiro
(818) 907-3270

 

 

One important part of motorcycle safety for most riders  includes keeping current on bike maintenance and motorcycle recalls. If your machine doesn’t run smoothly, you run an even higher risk of getting into a motorcycle accident.

“Hog” manufacturer Harley Davidson will attempt to do their part to keep their customers safe, following two reported incidents that may have been caused by poorly-designed brake light switches on their bikes, according to an ABC affiliate in San Francisco. They issued a motorcycle recall on Monday, which will go into effect on October 31. Here’s the problem:

It is reported that the switches for the brake lights may malfunction when they’re exposed to too much heat form the bike’s exhaust. This may cause the brake lights to glow when no brake is applied, or to not light up at all when the rider does engage the brake.

Another problem may be even more dangerous, as brake fluid may leak from the over-heated switch area. Apparently that was the case with one of the two incidents mentioned above – a Trike rider lost rear brakes in June of 2010.

The other incident, a motorcycle accident in Louisiana, is still under investigation.

If you’re a Harley owner, you should be getting a notification letter from the manufacturer soon. You can also check recall information on the Harley Davidson website by clicking on the “Owners” tab and then looking for the link to “Check Recalls.” You’ll need to sign in to get Harley Davidson recall information.

The motorcycle recall affects over 300,000 Touring, CVO Touring and Trike models rolling off the production line between 2008 and 2011. Consumer Reports website lists these models in particular:

FLHP 2009-2012
FLHPE 2009-2011
FLHR 2009-2012
FLHRC 2009-2012
FLHT 2009-2010
FLHTC 2009-2012
FLHTCU 2009-2012
FLHTCUSE4 2009
FLHTCUSE5 2010
FLHTCUSE6 2011
FLHTCUSE7 2012
FLHTCUTG 2009-2012
FLHTK 2010-2012
FLHTP 2009-2012
FLHX 2009-2012
FLHXSE 2010
FLHXSE2 2011
FLHXSE3 2012
FLHXXX 2011
FLTR 2009
FLTRSE3 2009
FLTRU 2010-2012
FLTRUSE 2011
FLTRX 2010-2012
FLTRXSE 2012

If you own one of the models affected, you’ll be able to take your Harley back to the dealership for a replacement brake light switch, free of charge.

But in the meantime, it’s probably best to find an alternate means of transportation until you do. When it comes to motorcycle safety, you don’t want to take any unnecessary risks.

Andrew L. Shapiro is the Chair of the Personal Injury Practice Group at Lewitt Hackman in Los Angeles, and has ridden motorcycles for over 30 years. You can reach him by calling 818.990.2120.

 

 
Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.
Thursday
Oct202011

How Green is Greenland? A Cold, Hard Question for One Publisher

Litigation Los AngelesEnvironmental Litigation  

Stephen T. Holzer
818.907.3299

 

What’s over 100 years old and sports a black eye?

The Times Atlas of the World, whose reputation took a hit because of the Greenland map published in its 13th edition, just might be such a contender.

The challenger, the Scott Polar Research Institute (SPRI) of the University of Cambridge Geology Department, studies the Arctic and Antarctic circles.

But what’s the fuss about? The Times Atlas made its latest edition available in September – it shows a Greenland map that looks a bit more green than white, which would indicate more flora and a lot less ice. Additionally, a press release from Times Books publisher, Harper Collins, stated that Greenland ice receded by about 15 percent in the last 12 years.

When the scientific team from SPRI protested these figures, other scientists warmed to the topic, causing Harper Collins to cite the US National Snow and Ice Data Center (NSIDC) in Colorado as the source of their information.

The site for the NSIDC does support the claim that the Greenland ice sheet is shrinking, by as much as 30 percent during the summers. However, more snow during the winter offsets some of this melt-off. NSIDC also joined SPRI in saying the Times Atlas got their facts wrong.

The SPRI webpage regarding Greenland ice does state that the ice sheet melts bit by bit every year, approximately one cubic kilometer annually, as a general measurement. But that’s no where near the Times Atlas figures or that of NSIDC. And satellite imagery differs from the maps the Times Atlas used.

So what does Harper Collins have to say about all of this? First the company stood by the figures. Then the company said the atlas info remained correct, but the information issued in the press release was misleading. Now the UK’s Daily Mail reports that Harper Collins admitted it was wrong and will make corrections. The publisher took these three positions in three consecutive days.

Now Harper Collins seems to have its own freeze on further statements regarding the topic. But the Times Atlas of the World homepage still makes the following claim, “The world’s most prestigious and authoritative atlas is a benchmark of cartographic excellence. In its 13th edition, it revels today’s world in all its glory and at its most fragile.”

The situation serves as a reminder that the public should not necessarily take any source on as infallible, when separating fact from fiction in the climate-change debate.

Stephen T. Holzer is a Los Angeles Environmental Law Attorney and Chair of our Environmental Law Practice Group. You can reach him by calling 818.990.2120.

 

 
Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120