FRANCHISE DISCLOSURE DOCUMENT PITFALLS

As I discussed in a former blog, the crucial document in any franchise operation is the uniform franchise disclosure document, or FDD. The first thing to determine in inspecting the FDDs is whether the franchisor has properly registered its offering circular when and where required and whether either state officials or franchisees have instituted disciplinary or legal action against the franchisor. If the latter is the case, the inspection of FDDs will sometimes turn up only a cursory reference to the same, making it necessary to track down and inspect other records – for example, court filings and regulatory …

DUE DILIGENCE MINEFIELD – PART 2

The things that can go wrong in the purchase of a franchise company are plentiful. Imagine the buyer of a franchise company who sells expansion rights to a new and promising territory to one franchisee only to discover that the seller has already sold them to another. Imagine the buyer who learns that some franchisees pay lower fees than others for, say, the advertising, marketing, or training assistance that the new franchisor is obligated to provide. Imagine the buyer who learns too late that the seller has violated the franchise laws of one state or another, generating fines that are now the legal obligation of the buyer. Last but not least, imagine the buyer who discovers 30 days after the closing that the seller failed to disclose pending sanctions by state regulators that could make it impossible to sign up new franchisees in their state for, say, one to three years…

BUYING FRANCHISE COMPANIES: THE DUE DILIGENCE MINEFIELD

Franchise companies are hot properties these days, and no wonder. Apples to apples, they’re generally more profitable than non-franchise companies, so they present tempting targets for financial buyers with lots of cash – for example, your friendly neighborhood private equity group, which has been particularly active in buying up franchise companies in recent years….