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.
1. .Wasting 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. Error-riddled documents. 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. Delaying the 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. That leads 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. Harming 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. 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.
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 from litigation. Consider these recent 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.