October 18, 2023
The Ultimate Game Plan: Drafting Essential Documents for a Winning Franchise
Franchising can be a great way to grow your business, but it requires specific paperwork and legal documentation.
Two of the most important documents you’ll ever draft in franchising are the Franchise Disclosure Document (FDD) and the Operations Manual.
Here’s what you need to know about each document:
Franchise Disclosure Document
The FDD is a legal document that must be prepared in strict compliance with Federal Trade Commission (FTC) rules and regulations in regard to formatting and content. By law, you can’t offer a franchise agreement (the contract or license to operate the business under the trade name) until you’ve given the prospective franchisee the FDD to review.
In addition to the requirements set forth by the FTC, currently there are 14 states that require franchisors to register their FDDs with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity (related to either residents or franchise operators) in the state.
Other states, commonly known as “filing” or “business opportunity” states, have less stringent requirements but still have steps that need to be followed to be able to offer the franchise in those states.
The FDD discloses extensive information about you and your business, divided into categories known as the 23 Items. These have detailed information to help a prospective franchisee make an educated decision prior to signing a franchise agreement. Some of the key information that must be included in the FDD includes:
- The franchisor: How long you’ve been in business, likely competition, and any special laws that pertain to your industry, such as license or permit requirements.
- Key persons: The identity and experience of executives and key management, including those who will represent the brand in franchise sales.
- Litigation history: Any history of litigation involving the franchisor or its officers.
- Initial fees: The fees that will be charged to the franchisee, including any initial franchise fees, training fees, and other charges due “up front” or prior to commencing business operations.
- Ongoing fees: The fees that will be charged to the franchisee on an ongoing basis – these include royalties, brand fund (local advertising spend), technology or software fees and other charges that are paid to the franchisor or required suppliers.
- Initial investment: The initial investment range that a franchisee can expect to invest in order to open the business.
- Pre-opening requirements and what it takes to sell (transfer) or renew the contract (if renewable) in the future.
- Franchisee contact information: Current and past franchisee lists.
- A blank franchise agreement.
One final reference typically included in the FDD is an outline of the Franchise Operations Manual for the prospective franchisee to review. You can read more on that below.
Franchise Operations Manual
The Operations Manual is a confidential document that outlines the initial business setup and standard operating procedures for the franchise. It includes essential details on how (and what) a franchisee will need to run the business – including the hours and days of operation, equipment, mandatory/recommended suppliers, design and branding requirements – as well as proven best practices for day-to-day management.
Franchisors are not required to provide prospects with their confidential Operations Manual before sale of the franchise if they include a Table of Contents (“TOC”), with the total number of pages devoted to each subject, as an exhibit in the FDD.
Here is some of the key information that is typically included in the Operations Manual provided to a signed and contracted franchisee:
- Business operation: explanation of how the business is conducted with specific information relating to opening and operating the franchise.
- Health and safety standards: an outline health and safety procedures.
- Policies: standards regarding products and/or services offered, supplies and materials used in the operation of the business, management, compliance, and high level policies that everyone in the business must adhere to in order to fulfill the brand standards. (These can include personnel policies such as uniforms that must be worn, standard greetings and how to deliver the customer experience unique to the brand.)
It’s important to note that the Operations Manual is an extension of the franchise agreement and both documents should reflect the unique qualities and traits of the brand. When you structure your franchise using these documents properly they not only educate, guide and protect your brand, they allow it to grow.
We recommend working with a qualified franchise attorney to develop your franchise system and legal documentation. The SMB Franchise Advisors team works closely with top ranked attorneys to craft the unique terms for each client’s franchise offering, helping to remain competitive through their FDD and franchise agreement. For clients who retain us to complete their Operations Manual, we tie it back to the FDD as we help them prepare a long-lasting tool that can help franchisees grow and succeed.
We are focused on creating a lasting relationship with you and your brand as we work together. If you have questions about the specific paperwork and legal documentation, such as the FDD or operations manual, we are ready to lend you our experience on how these essential documents are an important first step in your process to become a legal franchise.