Item 17, which breaks down renewal, termination, transfer and dispute resolution, serves as a cheat sheet to a franchisee’s entire agreement.
The franchising industry is no stranger to competition. With thousands of concepts currently up and running, brands are constantly looking for ways to stand out to consumers and potential business owners alike. However, as the industry continues to grow and get more crowded, it can become more difficult for prospective owners to find the concept that’s the best fit for them.
But according to Steve Beagelman, founder and CEO of SMB Franchise Advisors, the fact that there are thousands of potential franchise concepts out there is an advantage for future owners. It means that they have the ability to thoroughly vet different brands and determine which one is best suited to their strengths and local community.
“When it comes to finding the franchise concept that’s best for you, there are four things that you need to look for. The first is a passion for the concept. Second is that you need to like the people involved with the brand. After that, the brand needs to have territory available where you want to launch your business. And lastly, the concept needs to have the potential to meet your financial requirements,” said Beagelman. “When those four things align, you can confidently enter a franchise agreement knowing that you made the best possible choice. But in order to get to the point where you know that you’re interested in a brand, you need to take a look at its FDD.”
The FDD, or Franchise Disclosure Document, tells a franchise candidate everything that they need to know about a brand. The legal document is broken down into 23 different items, with each one providing its own look into a specific part of a brand’s business ownership opportunity. Item 17, for example, highlights the renewal, termination, transfer and dispute resolutions associated with a franchise concept.
Item 17 is important for candidates to understand because it explains whether or not their agreement can be renewed or terminated, and what their rights and restrictions are if they have a disagreement with their franchisor. That’s why Amy Cheng, founding partner of Cheng Cohen LLC, says it’s crucial for prospective franchisees to look at this item carefully.
“Item 17 is helpful for candidates because it summarizes the terms of their franchise agreement. It acts as a type of cheat sheet—franchisees who read this item instantly have all the information that they need when it comes to non-compete obligations and renewal rights,” said Cheng.
But even though Item 17 of the FDD is designed to give candidates a strong overview of what their rights are when it comes to renewing, selling or ending their franchise agreement, it’s not the end-all be-all of information on the subject. In order to get a full picture of whether or not a brand’s Item 17 information is right for you, Cheng recommends speaking with franchisees who have either renewed, transferred or ended their agreement with the brand. By gaining multiple perspectives on how the brand handles and settles disputes, candidates are better able to decide if they’re a good match or not.
“One thing that’s absolutely essential for prospective franchisees to keep in mind is that franchising is a two-way street. Even though you have an obligation to read through an understand a brand’s FDD, it’s the franchisor that’s obligated to disclose information about its opportunity in the first place,” said Cheng. “That’s why it’s so important for aspiring franchisees to take the time to read the entire FDD. While Item 17 provides a good snapshot of what a brand’s agreement is all about, it’s not comprehensive enough to guide a candidate’s entire franchise selection process.”