• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Submissions
  • About Us
  • Contact Us
  • Aug 19, 2022
  • Startup
    • Creating a Plan
    • Funding a Startup
    • Franchise Center
    • Getting Your Office Ready
    • Making Your Business Official
    • Marketing Your New Business
    • Personal Readiness
  • Run & Grow
    • Customer Service
    • Human Resources
    • Innovation
    • Legal
    • Operations
    • Risk Management
  • Leadership
    • Best Practices
    • Communication
    • Green Initiatives
    • Open Culture
    • Strategic Planning
    • People Skills
  • Sales & Marketing
    • Advertising and Lead Generation
    • Marketing Innovations
    • Marketing Plans
    • Online Marketing
    • Relationships
    • Sales Activities
  • Finance
    • Budgeting and Personal Finance
    • Payments and Collections
    • Tax and Accounting
    • Pricing Strategy
    • Working with Investors
    • Working with Lenders
  • Tech
    • eCommerce
    • Hardware
    • Software
    • Security
    • Tech Reviews
    • Telecom
  • Shop

SmallBizClub

Helping You Succeed

Home / Startup / Franchise Center / The Most-Litigated Issues in the FDD
The Most-Litigated Issues in the FDD

The Most-Litigated Issues in the FDD

719 Views

Apr 6, 2017 By Robert Steinberger

As franchisors, we all strive to sell units quickly. Especially for franchisors just starting out, the main focus tends to narrow in on closing the initial deal.

Unfortunately, selling the unit doesn’t automatically produce a fairy tale ending. As much as we would like to write a happily ever after for all parties involved, oftentimes there are a few bumps throughout the life of a franchise unit.

Many times, these bumps signify expensive litigation.

Out of the 23 disclosures required in the FDD, three specific ones land franchisors in arbitration more often than others. When you are jumpstarting your journey franchising your business, make sure to pay special attention to these three areas to ensure you aren’t leaving yourself liable to litigation down the road.

1) Territory Disputes

The number one litigated issue falls squarely in the realm of territory disputes. FDD Item #12 outlines the guidelines for a unit’s territory. For a brick and mortar business, this will include a geographical radius and the rationale for territory allotments (such as population density or square mileage), among other territory rights and restrictions.

In many cases, the success of an individual franchise unit can be directly tied to the assigned territory. For instance, a high-ticket product won’t succeed in a low-income neighborhood.

In other instances, success relates directly to volume. Additionally, a competing unit moving into the neighborhood can, understandably, undermine all the efforts of an existing unit and infiltrate their marketing

Franchisees feeling their struggling business is directly impacted by either their allotted territory or competitor franchisees being placed on the border of their territory often take legal action.

Recommendation:

I can’t emphasize enough the importance of considering demographics and population density when deciding territory assignments. There are different programs and consultants out there who help growing franchises ensure territory assignments allow for franchisees to succeed in a given territory.

2) Estimated Initial Investment

Next down the list of most litigated items, we have the estimated initial investment. Marking item #7 in the FDD, this disclosure includes a chart outlining the high and low ranges associated with opening the franchise. For brick and mortar venues, expect to see costs such as furniture, tenant improvement costs, real estate, permits, and equipment.

This is arguably one of the more important disclosures since it outlines how much a franchisee will need to invest into the franchise.

Franchisees spending far above anticipated costs may run into financial trouble seeing the opening through or covering their own living expenses through the process. This becomes even more problematic if a franchisee bought into a multi-unit investment, since those unanticipated costs can delay the opening of the other units. If the first unit took an additional $50,000 to open, the problem compounds with each additional unit.

Franchisees in this scenario will likely hold the franchisor responsible for providing inaccurate cost estimates.

Recommendation:

It’s essential to continually be reviewing and refining initial investment numbers. In dynamic real estate markets, these numbers may fluctuate drastically throughout a two-year period. Additionally, costs vary wildly based on location. Startup costs in Los Angeles, Calif. will skyrocket compared to opening a brick and mortar in Boise, Idaho.

Real estate isn’t the only variable. Particular products or supplies can suddenly spike in costs as the country addresses scarcity issues.

3) Earning Claims 

While likely seeing a similar volume of litigations, it’s hard to pinpoint how earning claims compare to other litigated elements of the FDD since including them as part of #19 Financial Performance Representations is optional.

Coming in as the third most litigated element of the FDD, Earning Claims prove to regularly be a point of contention. When a franchisor compiles financial representations, there needs to be a good faith belief that they are accurate. Depending on how many units are open and how long they’ve been open, you may need to break up earning claims by how long the businesses have been open.

Examiners will look into these numbers to ensure not only that they are true, but also that they tell the whole story. Lumping the affiliate store that has been open for over twenty years into the mix without highlighting the length of time they’ve been open paints an inaccurate picture for a new location.

Just because you don’t include earning claims doesn’t mean that you can’t end up in litigation because of it. Should you decide to not include earning claims, the franchisor cannot talk about earnings at all. Doing so without providing the official documentation is a very serious offense. This includes casual remarks or hinting at possible earnings or any financial representations.

Recommendation:

Should you choose to include Financial Performance Representations, it’s essential to tell the whole story. This includes accounting for different geographical regions, evaluating based on the competition in a region and factoring in economic trends.

Partnering with an Experienced Franchise Lawyer 

One essential component to limiting vulnerabilities that lead to costly litigation is to partner with an experienced franchise lawyer from the beginning. From ensuring you have the proper systems in your business to building out the FDD to helping you expand across the nation, a franchise lawyer can work with you to lay the legal foundation for long-term success.

Filed Under: Franchise Center Tagged With: Franchises, Legal Issues

Source: Legal Matters LLP

Robert Steinberger

Robert Steinberger

Robert Steinberger, who often goes by Bob, is a founding partner of the Law Offices of Soden & Steinberger, LLP. He is adept at both creating the best legal structure for enterprises as well as setting the foundations for franchise owners and buyers. While Bob’s practice focuses on both business entity formation and litigation, his specialty is franchise law. As a part owner of a franchise, he brings a unique perspective to navigating the franchise landscape. His free Franchisor Workbook gives a head start on expanding a business empire.

Related Posts

  • 6 Signs A Particular Franchise System Isn’t For You
  • after-llc-formation--what-s-the-next-step-7 Things Every Operating Agreement Must Include
  • Why Should You Hire a Business Lawyer?

Primary Sidebar

Random

Starting a Business? Here are the First 3 Steps You Need to Take

Aug 8, 2018 By Meredith Wood

The Money’s in the Magazine: Why SMBs Need Print Marketing

Jul 21, 2014 By SmallBizClub

How to Find & Fix These 3 Red Flags in Your Google Analytics Data

Jun 6, 2017 By SEER Interactive

10 Thinking Methods That Foster Business Innovation

Apr 3, 2019 By Marty Zwilling

How Accepting Bitcoin Can Help Your Business

Jul 7, 2017 By YEC

Footer

About Us

Small Biz Club is the premier destination for small business owners and entrepreneurs. To succeed in business, you have to constantly learn about new things, evaluate what you’re doing, and look for ways to improve—that’s what we’re here to help you do.

  • Facebook
  • LinkedIn
  • RSS
  • Twitter

Copyright © 2022 by Tarkenton Institute, Inc. All Rights Reserved | Terms | Privacy