An interesting and lively discussion arose between “franchisee attorneys” and “franchisor attorneys” in the audience during a presentation on FDD Drafting at this year’s ABA Forum on Franchising Annual Meeting in Seattle.  The issue centered around the initial question of whether a franchisor should keep the ranges of costs in the Item 7 Estimated Initial Investment table tight and eliminate any outliers that make the low and high estimate too broad.   The rationale for this position is that the very low or very high outliers may not be a real or accurate representation of the true costs a supermajority of franchisees will incur.  In addition, a range too wide degrades the purpose of the disclosure.

Copyright: ratch0013 / 123RF Stock Photo
Copyright: ratch0013 / 123RF Stock Photo

Some audience members said they addressed this issue by keeping the explanations clear in the footnotes and eliminating atypical expenses.  For example, many franchise systems specifically do not include real estate purchase costs if most franchisees in the system lease and do not buy land.   One attendee pointed out that most Item 7 footnotes also contain numerous disclaimers to make sure that a franchisee knows that its own expenses may vary.

The discussion then quickly moved onto whether a franchisor’s counsel has a duty to  investigate and/or provide franchisor clients with advice regarding whether the Item 7 estimate ranges are accurate and couched in fact.  A franchisee attorney in the audience pointed out that an FDD is not a Franchise Disclaimer Document and a franchisor should not be able to avoid sloppy work by disclaiming away the estimates.  Franchisor attorneys quickly responded that an FDD is also not a Franchise Guarantee Document and it is not fair to presume that every franchisee can expect to fall within the range every time.

What if a start-up franchisor or international franchisor expanding to the US does not properly hire a consultant or otherwise  undertake the proper research to make reasonable and responsible Item 7 estimates?  I work with many start-ups and international franchisors moving into the US.  In each case I do make it a practice to point out any abnormally broad ranges or estimates that look wildly inappropriate while still making it clear that I am not an expert such projections.  Moreover, I encourage what I think is the best practice of hiring knowledgeable consultants for this purpose.  Obviously this is a hot-button topic and it was interesting to hear the varying opinions by different franchise practitioners at the Annual Meeting this year. I’d be interested to hear your thoughts in the comments below.