We are in the process of purchasing a Vending Franchise based in California. When we requested them an FDD, they provided us with FDD ending December 2011 and said that they are currently working on the FY12 ending December 2012.
I understand that there are FTC and CA board of corporations regulations guiding the Franchisor's to provide certain information (in FDD) before the purchase of the Franchise. What exactly do these Franchises need to provide a consumer interested in buying their Franchise? Does providing the latest FY FDD part of what they have to disclose?
What other questions do we need to ask before the purchase?
Any advice would be greatly appreciated.
The franchisor is required by federal and CA law to provide you with a current FDD. A franchisor must update their FDD within 120 days of the fiscal year end, which for many companies is December 31st. However, if a fiscal year end is earlier in the year, it would be 120 days from that date.
I would check with the CA Attorney General's office (800-952-5225) if this franchisor is current with their registration and renewals.
As far as other suggestions, I would strongly recommend that you review my advice given in The Costco Connection from February, 2008 when they did a cover story on Franchising - here is the link: http://www.spadealaw.com/sites/default/files/Fr.... I would also suggest that you review the many blog posts I have written on what a prospective franchisee should know before investing in a franchise. In addition, if you would like to contact me about this situation, I would be happy to speak with you (215-525-1165 x101).
As a franchise attorney , who has actually walked the walk, owning and operating a very successful franchise, and a court-accepted, testifying franchise expert, I can say the following.
In California, their registration will be expiring very soon, around April 20th. You should definitely wait for their updated FDD ending 12-31-12 as it will have updated financials for 2012, updated lists of franchise turnovers, transfers, terminations, etc.
Kevin B. Murphy, B.S., M.B.A., J.D.
Franchise Attorney & Franchise Expert
Director of Operations - Mr. Franchise
FRANCHISE FOUNDATIONS APC
I agree with my colleagues answers. In addition, here is a very useful resource put out by the FTC: Buying a Franchise: A Consumer Guide
I do strongly urge you to have an experienced franchise attorney review the FDD and Franchise Agreement before committing to any franchise. It's usually a good Idea to have your accountant or business adviser involved as well. The up-front cost is well worth the price of avoiding problems later on. We offer reviews at a very reasonable price that is actually a loss-leader for us, so well below the actual cost of review.
Singler & DIllon, LLP
Here's the pragmatic answer: Ask the Franchisor for the Red-lined copy of the Dec 2011 Disclosure (red-lined to show changes that will be in the Dec 2012 document) which they are required to provide to the State of CA, generally by March 29th to comply with their April 20th expiration of the document you got. That way you get to see the changes highlighted from what they gave you. Tell the Franchisor you will sign an agreement acknowledging that what they are giving you is not yet registered or approved by the state of CA, and that you will not rely on it to purchase your franchise etc etc. The bottom line is if you do not purchase a franchise by April 20th on the 2011 document, generally the Franchisor must give you the newer version which you will then have to sign. Here's the important part: YOU WANT TO SIGN THE VERSION THAT IS MOST BENEFICIAL TO YOU. If you explain that they will know you know what you are talking about. Too much information changes from year to year e.g. in the business counts, the litigation, the audit report, the training program, the officers, and possibly more fees in the newer version. You should get both versions. Aside from that, you also, definitely need a franchise attorney to review the document for pragmatic concerns, on a fairly quick basis. I can certainly help you with this if you want to contact me off line. Janet Martin
Both the FTC and the state of California require that a franchisor provide you with the most current FDD. The FDD will provide information in 23 disctinct categories. As of today, the FDD dated 12./1/2011 would be that document. However, that will soon become stale and the franchisor will then have to deliver a FDD current as of the end of 2012. The FDD is the main source of information from the franchisor. The franchisor cannot provide information that is contrary to that set out in the FDD. If there are no financial performanace representation in the FDD(contained in Item 19)the franchisor cannot talk to you about your expected revenues, income or earnings. You can get more information by asking questions of the franchisor. The scope of these will vary and may result from your review of the FDD or be based on specific matters that are of concern to you. The FDD contains lists of current andd former franchisees; contact them to discuss their experiences with the franchisor. Ask the current ones if they would buy an additional franchise; does the franchisor train adequately; how is the level and depth of support. Ask the former ones why they left(were they terminated, did they sell, did they just walk away). If you are serious, you should consider consulting with an experienced franchise lawyer who can give you guidance as you evaluate the franchise opportunity. You will be making a significant investment in both time and money. Experienced advice will more than pay for itself.
Take your time. Do not get enamored by the sales presentation and the "really nice" sales person. Best of luck
Under FTC and California state laws, franchisors are required to give a prospective franchisee a FDD disclosure document or FDD.
Franchisors are required to update the FDD each year 120 days after the close of their fiscal year under the FTC rule. If the fiscal year ends December 31st, the franchisor has until April 30th to update the FDD. California follows a similar schedule. Franchisors must register with the state each year. The annual state registration expires on April 20th.
In just a short time franchisors must have their FDD updated with 2012 data numbers. Wait a couple of weeks or ask the franchisor for the 2013 FDD. In most states (there are a few exceptions) there is no obligation to update the FDD with current financials , outlet numbers unless there is a material change. Of course if there is change in such things as royalty fees, the president of the franchisor, or other material things, the FDD must be updated under the FTC Rule and state laws.
I hope this helps!
Mary Beth Gettins
Gettins' Law, LLC
A franchise is a type of business in which the operator leases the right to use another firm’s brand and business model.
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