FRANCHISE LEGAL

DOCUMENTS

Reporters: Karl Xander Celso

John Lester Yumul
 Franchise Legal Documents
The laws on franchising are comprehensive, requiring
franchise legal documents.
These franchise legal documents clearly spell out your
relationship with your Franchisees and your mutual
responsibilities.
 DISCLOSURE REQUIREMENTS
“Offering circular”

A franchise disclosure document (FDD) is a legal

document which is presented to prospective buyers of
franchises in the pre-sale disclosure process in the 
United States. It was originally known as the Uniform
Franchise Offering Circular (UFOC) (or uniform
franchise disclosure document), prior to revisions
made by the Federal Trade Commission in July 2007.
Franchisors were given until July 1, 2008 to comply
with the changes.
 DISCLOSURE REQUIREMENTS
“Offering circular”

 Rule requires the franchisor to deliver the franchise

agreement.
A. The parties’ first personal, face-to-face meeting to
discuss the sale or possible sale of a franchise.
B. At least ten business days before the franchisee
executes a binding legal document or makes
payment of any consideration for the franchise.
 Contents of the Offering Circular
 COVER PAGE
The FTC cover page displays required language admonishing the
investor to investigate the offering carefully and contact authorities
if there is anything missing from the document.

 THE FRANCHISOR AND ANY PARENTS, PREDECESSORS, AND

AFFILIATES
This section will give you a general sense of the fanchisor, the franchise
offering, the franchisor’s prior business experience, and the length
of time it has been offering franchises.

 BUSINESS EXPERIENCE
This section lays out the business experience of the company’s
directors, principal officers, and other executives who have
management responsibility for the franchise program.
 Contents of the Offering Circular (cont.)
 LITIGATION
Three types of litigation must be disclosed on this Item;
i. Pending administrative, criminal, and material civil actions.
ii. Concluded criminal or material civil actions during the 10 year
period before the date of the offering circular
iii. Currently effective restrictive orders from a court when the order
relates to the franchise.
 BANKRUPTCY
This section will reveal if the franchisor, its or any of its officers have
been involved in a bankruptcy in the prior 10 years.

 INITIAL FEES
Requires the franchisor to disclosure all of the initial fees and other
charges to be paid by the franchisee prior to opening the business.
Contents of the Offering Circular (cont.)
 ESTIMATED INITIAL INVESTMENT
This item summarizes the franchisee’s total initial investment and
displays it in chart form.

 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES

If the franchisee is required by the Franchise Agreement to purchase
only approved products, or goods and services only from approved
suppliers, or from only those suppliers designated by the franchisor.

 FRANCHISEE’S OBLIGATIONS
The Franchise Agreement and the UFOC where various franchisee
obligations, such as buying insurance and reporting information to
the franchisor, are located.
 Contents of the Offering Circular
(cont.)
 FINANCING
If the franchisor offers financing for any part of the franchisee’s
investment, the details of the financing will be discussed here.

 FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER

SYSTEMS, AND TRAINING
This is the longest narrative section of the document, detailing the
contractual commitments that the franchisor makes to the
franchisee, both before and after the opening of the business.

 TERRITORY
The franchisor will describe any territorial rights the franchisee is
granted under the Franchise Agreement.
 Contents of the Offering Circular
(cont.)
 TRADEMARKS
Information about the “ principal trademarks”

 PATENTS, COPYRIGHTS AND PROPRIETARY

INFORMATION
The UFOC requires a detailed description of any copyrights or
patents that are material to the franchised business.

 OBLIGATION TO PARTICIPATE IN THE ACTUAL

OPEARATION OF THE FRANCHISE BUSINESS
The franchisor must disclose whether the franchisee is required
to participate personally in the operation of the franchised
business.
 Contents of the Offering Circular
(cont.)
 RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
The document reviews any restrictions or conditions imposed by the
franchisor which limit the goods or services the franchisee or the customers
to whom the franchisee may sell.

 RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION

The subjects relate to the duration of the contract, renewal rights. Whether
renewal involves the execution of a new and possibly different Franchise
Agreement, conditions for transfer, termination and any restriction on
competitive activity during and after the term of the Franchise Agreement.

 PUBLIC FIGURES
The company must disclose the extent of the public figure’s involvement in
the actual management of the franchisor and the public figure’s total
investment in the franchisor.
 Contents of the Offering Circular
(cont.)
 FINANCIAL PERFORMANCE REPRENSENTATIONS
(formerly referred to as “ earnings claims”) The claims must
have a “reasonable basis” in fact and must disclose the
material assumptions underlying their preparation and
presentation.

 OUTLETS AND FRANCHISEE INFORMATION

This item requires the franchisor to enclose as an exhibit a
list of the names, addresses, and telephone numbers of
those franchisees who left the system for any reason in
the franchisor’s preceding fiscal year.
Contents of the Offering Circular (cont.)
 FINANCIAL STATEMENTS
This item requires disclosure of the franchisor’s audited financial
statements for the prior three fiscal years.

 CONTRACTS
This items requires the franchisor to enclose as an exhibit a sample
copy of the Franchise Agreement, all related documents, and
any other agreements that the franchisee will sign.

 RECEIPTS
This item contains two identical copies of a receipt for the delivery
of the Uniform Franchise Offering Circular. One is designated to
be retained by the franchisor; the other by the franchisee.
 CONTRACT
 A franchise agreement is a complex contract, representing the
binding understanding between the franchisor and the
franchisee.

 AREA DEVELOPMENT AGREEMENT

This contract will allow a developer to build a number of
franchised businesses in a particular market area and each one
will be governed by the terms of a franchise agreement granted
by the franchisor.

 SUBFRANCHISING CONTRACTS
In these programs, a subfranchisor is granted the right to locate
and sell individual franchises to individual investors in a
defined region.
 THE FRANCHISE AGREEMENT
 A Franchise Agreement is a legal, binding contract between a
franchisor and franchisee.

 INTRODUCTORY PRELIMINARIES (“RECITALS”)

This portion of the agreement recites the parties who are entering
into the contractual commitments, and lays out the basic
mutual benefits of entering the contract.

 GRANT OF THE FRANCHISE

This key provision actually grants the franchise rights to the
franchisee.
 FRANCHISE AGREEMENT (cont.)
 TERM AND RENEWAL
The duration of the contract will be specified.

 TERRITORIAL RIGHTS
These take the form of a promise by the franchisor that it will not
establish another franchised business within a certain
geographic area.

 TRAINING AND GUIDANCE

These provisions detail the training to be provided by the
franchisor, where it will be provided, and who is required to
attend.
 FRANCHISE AGREEMENT (cont.)
 TRADEMARKS AND COPYRIGHTS
Trademarks have been called the cornerstone of the franchise
relationship. These important commercial symbols are part of every
franchise program.

 FEES TO BE PAID BY THE FRANCHISEE

A royalty fee is an ongoing fee that the franchisee pays to the franchisor.
The franchisor uses the royalty fees to support its existing franchisees
and maintain and grow the franchise system.
 IMAGE AND OPERATING STANDARDS
Operational standards will be adopted for the equipment and décor of
the business, the menus, the music, the words used by front line sales
representatives.
 FRANCHISE AGREEMENT (cont.)
 ADVERTISING AND OTHER PROMOTION ACTIVITY
If the franchisee wants to run an advertisement for the business,
most franchise systems it would have to receive advance approval
from the franchisor.

 RECORDKEEPING AND REPORTING

The reporting of sales activity will be of prime importance to the
health of the entire franchise network.

 INSPECTIONS AND AUDITS

This provision allows the franchisor to physically inspect the
premises of the franchised business and to review the franchisee’s
financial books and records.
 FRANCHISE AGREEMENT (cont.)
 SITE SELECTION
Site selection is the process of examining multiple options and assessing
their relative advantages and disadvantages.
 CONFIDENTIAL INFORMATION
This provision often requires that the franchisee provide confidential
information to store employees only on a “need to know” basis and
only where steps are taken to protect the information.

 TRANSFER OF FRANCHISE RIGHTS BY THE FRANCHISEE

This provision generally allows the franchisee to sell his business to
another person, who will then become the franchisee, only after the
franchisor approved the transaction.
 FRANCHISE AGREEMENT (cont.)
 TERMINATION
The franchise agreement termination provision allows the
franchisor to end the relationship only in several circumstances.

 FIRST REFUSAL RIGHTS TO PURCHASE

Many franchise agreements reserve to the franchisor the right to
buy back a franchise if the franchisee receives to purchase it. The
repurchase is usually required to be on the same financial terms
as the offer received from third party.
 FRANCHISE AGREEMENT (cont.)
 OBLIGATIONS OF THE FRANCHISEE ON TERMINATION OR
EXPIRATION
If the relationship comes to an end, the franchise agreement usually
requires the franchisee immediately to cease using the trademarks, take
down the signs, the remove all forms of décor, interior signs, color
schemes that identify the franchise, and assign to the franchisor the
telephone numbers used by the business while it was part of the system.

 ENFORCEMENT AND MISCELLANEOUS “BOILERPLATE”

PROVISIONS
This section of a franchise agreement addresses a number of arcane legal
subjects that clarify how the parties agree to have the contract
interpreted and enforced. These sorts of provisions are common to most
commercial contracts, “boilerplate” they are like the cast iron plating of a
heat generating boiler, available in mat or plate form for the contract.
THANK YOU!