Do-It-Yourself Franchise Documents: What You Don't Know Can Hurt You

To save money, many entrepreneurs who are planning to franchise their businesses consider either drafting their own franchise documents, hiring a franchise consultant to draft them, or using a lawyer without franchising experience. Their reasoning is simple enough: Copies of the franchise documents of some of the most respected franchisors can be obtained online at little or no cost. Why not just modify those documents to reflect the name of the new franchisor and change the industry references (if your business and the original franchisor's industries are different)?

To many entrepreneurs, the franchise agreement and Franchise Disclosure Document (FDD) appear to be obstacles to selling franchises. They believe that if these obstacles can be removed, and the documents can be registered in states that require it, then spending the time and money to do a good job can be put off to another day. Unfortunately, the “DIY” approach to franchise documents can lead to considerable problems. Let’s take a closer look at a few of them.

5 reasons not to create your own franchise documents

1. It's a waste of time

Drafting franchise documents takes a lot of time, even if the “drafter” is mostly cutting and pasting from another company’s forms. In most cases, you can spend that time more productively on tasks that better match your talents, such as preparing a business plan for your new franchise, creating operations manuals, and dealing with supply chain issues.

2. Documents may be riddled with errors

Few entrepreneurs are trained to draft legal documents. The result is documents filled with ambiguities and inconsistencies. Unless they specialize in franchising, even lawyers typically lack adequate knowledge of the business and legal concepts required to create both a successful franchise program and a sound franchise agreement.

And while franchise consultants may understand the franchise industry, they lack the legal training needed to draft adequate franchise documents. (In fact, by preparing franchise documents, consultants may be involved in the unauthorized practice of law.)

3. It can delay the franchise registration process

In a dozen states, franchises must be registered before they may be offered for sale. And in many states, new franchisors are also required to comply with state business opportunity laws. DIY documents are likely to be rejected by the state franchise examiner, which can lead to considerable frustration and months of wasted effort as you try to resolve the problems.

Even if your documents are finally accepted and your franchise is successfully registered, that merely indicates you’ve made the disclosures required to sell a franchise. It doesn’t mean that your franchise agreement will survive scrutiny if challenged in the courts.

4. It may harm your franchise's image

The quality of your FDD and franchise agreement reflects the quality of the franchise being offered. Poorly drafted documents are a signal to prospective franchisees and to their lawyers that a franchisor does not pay attention to details—and details are often the difference between a successful and an unsuccessful franchise.

5. Franchise documents risk being out-of-date

Franchise law is constantly evolving, and even franchise agreements that were used in the past by well-known franchisors must undergo constant revision to avoid costly litigation or, worse, substantial damage awards. If you base your agreement on someone else’s existing franchise agreement, you are putting your business at risk.

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The FDD is a critical legal document

Your franchise documents are not simply “necessary evils” to check off as quickly as possible along the path to your franchise offering. They are crucial legal documents that protect you and your franchise company from litigation. Consider these cases:

A pizza chain’s franchise agreement stated that it could set specifications for the computer system franchisees used. When the franchisor required franchisees to use a prescribed computer system, franchisees alleged that the franchisor could set specifications, but could not designate a particular manufacturer's products. The franchisor ultimately won, but spent more than $1 million in legal fees.
A deli chain’s franchise agreement prohibited franchisees from directly or indirectly engaging in a business whose methods of operation were similar to that of the franchisor during the term of the franchise agreement. However, because the covenant lacked a geographical and time limitation, the court deemed it unenforceable.
A steakhouse chain’s franchise agreement stated that it would not establish another restaurant within an “exclusive radius” of 2 miles from a franchisee’s restaurant. When the franchisor established a new franchise 2.17 miles away, a franchisee alleged it could no longer sustain its business and was forced into bankruptcy. The bankruptcy court declined to dismiss the franchisee’s breach of contract claim, concluding that the phrase “exclusive radius” suggested that franchisees’ protected areas would not overlap.

As you can see, when it comes to franchise documents, details matter. Unless you understand the legal implications of every word in a franchise agreement, and unless you know exactly what information must be disclosed in an FDD and how, you will end up with documents that may not enable you to collect fees from franchisees or to enforce your franchise agreements.

Your franchise documents should be strong enough to protect you

Getting your franchise documents registered is only one part of the process. Having agreements that are enforceable and can withstand legal challenges is essential. When franchisees feel cheated, or when they lose the money they have invested, they usually strike out against what they believe to be the cause of their troubles: the franchisor.

If you are hit with a lawsuit, your franchise documents serve as your shield. Make sure they are expertly crafted and strong enough to defend you.

About the Authors

Carl Zwisler and Katherine Wallman are franchise lawyers in the Washington, DC, office of Gray Plant Mooty. A former General Counsel to the International Franchise Association, Zwisler has practiced franchise law for 35 years. Wallman and Zwisler work with companies to structure their franchise programs.