On Dangerous Ground

Franchisors often give prospective franchisees questionnaires. The questionnaires have various names, like “Prospective Franchisee Questionnaire” or “Statement of Prospective Franchisees.” They are commonly referred to simply as “Questionnaires.”

Questionnaires usually have three material parts. The first part asks the prospective franchisee (or in the case of a company, the company’s owners) questions about the relationship between the prospect and the franchisor. The best questions are short and simple. They ask the prospect to answer “yes” or “no” to questions like:

1. I received a copy of the franchisor’s Franchise Disclosure Document and each exhibit and schedule to it.
2. I personally reviewed the franchisor’s Franchise Disclosure Document and each exhibit and schedule to it.
3. I gave the franchisor a Receipt showing that I received the Franchise Disclosure Document and the date I received it.
4. I received the Franchise Disclosure Document at least fourteen (14) days before I signed any agreement with the franchisor or gave the franchisor any consideration related to the purchase of a franchise.
5. I received complete copies of the franchisor’s Franchise Agreement and all other agreements the franchisor required me to sign, with all blanks filled in, at least seven (7) days before I signed them.
6. I reviewed the Franchise Disclosure Document and all exhibits and schedules to it with my attorney, accountant, and other professional and business advisors.

The second part usually asks the prospective franchisee to initial each paragraph in the second part of the Questionnaire to certify that certain information is true. The information includes items like:

1. I hereby certify that no employee of the franchisor, and no other person speaking on the franchisor’s behalf, has made any representation, commitment, claim, or statement to me that is different from, or that is contrary to, any of the representations, commitments, claims, or statements contained in the franchisor’s Franchise Agreement and Franchise Disclosure Document.
2. I hereby certify that no employee, no employee of the franchisor, and no other person speaking on the franchisor’s behalf, has: (i) made any oral, written, visual, or other representation, commitment, claim, or statement, that stated or suggested any level or range of actual or potential sales, costs, income, expenses, profits, cash flow, or otherwise; or (ii) made any oral, written, visual, or other representation, commitment, claim, or statement from which any level or range of actual or potential sales, costs, income, expenses, profits, cash flow, or otherwise might be ascertained, related to a franchise, that is different from, contrary to, or not contained in, the franchisor’s Franchise Agreement and Franchise Disclosure Document.

The third part usually asks the prospective franchisee to state the dates that certain actions were performed, like:

1. The date on which I received the franchisor’s Franchise Disclosure Document about the purchase of a franchise was: [Date]
2. The date on which I received copies of the Franchise Agreement and other agreements for the purchase of a franchise was: [Date]
3. The earliest date that I delivered cash, a check, or other consideration to the franchisor in connection with the purchase of a franchise was: [Date]

The Questionnaire is useful for two reasons. First, the prospective franchisee’s answers to the Questionnaire help rebut claims that the franchisor failed to comply with the law. As one example, a German franchisee claimed that my U.S. franchisor client: (i) did not provide the German franchisee with a copy of the franchisor’s International FDD; (ii) made unauthorized financial performance representations; and (iii) violated German laws governing fraudulent misrepresentation. The German franchisee was owned by a citizen of Luxembourg. The franchisee engaged a German attorney. The German attorney wrote a demand letter that was as impassioned as it was fact-free. The franchisee had neglected to give its attorney the copy of the Questionnaire the franchisee had filled out and signed. I prepared a detailed response that included relevant parts of the Questionnaire. I attached the Questionnaire to the response, and sent the response and the Questionnaire to the German attorney. I did not hear from him again. The German franchisee then engaged a Luxembourg attorney. The process repeated itself. I never heard from the Luxembourg attorney again. That simple Questionnaire probably saved my franchisor client $100,000+ in attorneys’ fees and costs fighting a baseless action in Germany, Luxembourg, or both.

Second, the Questionnaire is useful because it helps confirm, before the sale of the franchise, that the transaction complies fully with applicable laws. As one example, if a prospect states that it did not receive the FDD within the time required by the FTC Franchise Rule, the date of closing of the transaction can be changed. As another example, if the FDD was missing an exhibit, the franchisor can provide the exhibit.

Plainly, the Questionnaire helps both parties. If the prospective franchisee did not get full, fair, and correct information, the franchisor wants to provide it before the transaction is completed. The franchisor WANTS the prospective franchisee to be able to terminate the transaction if the prospect does not like what it sees. If the franchisee engages in litigation after it signs, both parties lose.

Nonetheless, the United States Federal Trade Commission (the “FTC”) is considering limiting the right of the parties to benefit from the use of Questionnaires. There is no good reason to restrict their use. The FTC’s action is simply an effort to hamstring the parties by inserting yet another governmental requirement into a private transaction. The proposed restrictions put both franchisors and prospective franchisees on dangerous ground, for no good reason.

This blog will keep you updated on the progress of the FTC’s efforts.