This is Part 5 in a group of posts that is designed to give readers a primer on the most important document to a franchise – the franchise disclosure document.
Item 13: Trademarks
This section is straightforward but important to your franchisees as it is arguably the most important component of what they are purchasing. It identifies all of the franchisor’s registered trademarks and the information regarding such registration.
The one incredibly obvious red flag that can come up here with regard to a registered trademark is if there is anyone contesting the rights in that trademark. Additionally, if the trademark has been filed but the registration is pending, you will likely face some questions from your potential franchisee regarding the USPTO’s approval.
As a franchisor, you will have to disclose whether or not you are obligated to pursue legal action against those that infringe your trademark. I advise clients to accept this obligation as not only does it benefit them to vigorously protect their mark, but the franchisee may consider it a positive in evaluating the opportunity.
In addition to questions regarding the registration, you may face some questions about the value of the trademark itself, including:
- How well known the brand is in the region in which the franchisee is seeking to open his or her business
- How well known the brand is in the United States at large
- If the franchisor has full use of the trademark
Item 14: Patents, Copyrights, and Proprietary Information
Item 14 is another straightforward, but less often important, section of the franchise disclosure document that lays out other intellectual property rights the franchisor holds. Depending on your franchise model, holding a wide assortment of intellectual property rights (especially relative to competitors) could be very valuable.
Again, franchisees will be concerned with any limitation on these rights, especially if a third party contests them.
Item 15: Obligation to Participate in the Franchise Business
This section discloses whether or not the franchisee will be required to personally participate in the day-to-day operations. If not, you must state whether you recommend such participation. Additionally, this is where you must disclose any restrictions on whom the franchisee can hire as a supervisor.
I strongly recommend that the franchisee be required to participate in the day-to-day operations as there is a strong correlation between such participation and success of the franchise. After all, one of the biggest advantages of franchising is that you have franchisees that have an interest in the success of the business beyond a weekly paycheck. Ideally, you want your franchisees to think of themselves as “lifetime managers,” not passive owners.