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Log In / Register | Oct 22, 2017

Franchisor Blunders, No Wonder Buyers Don’t Read FDDs

The Franchise Disclosure Document (FDD) should be seen by franchisors, their attorneys and state and federal regulators as the most valuable tool for perspective buyers prior to making their decision as to where they want to invest their money into a franchise. The 200-, 300-, or even 500-page document should contain pertinent data and financials about the system, and what protections are given to franchisees in making their investment of tens or hundreds of thousands of dollars.

When franchisors and their legal counsel get it wrong in the company's FDD, making errors, misrepresentations and omissions, it can cause turmoil, financial devastation, and costly litigation for franchisees.

One franchisor, through its prominent experienced law firm, and even with the oversight of a state regulator, did exactly that. They all got it wrong. As of today, the Smashburger franchise disclosure document that was due to be amended in Minnesota on December 29, 2016, shows its registration for buyers with another company's name and pertinent information and financials. Instead of getting the hamburger chain's 300-page document, prospects receive a 60-page FDD for FUSA, Inc., an automobile collision repair franchise unrelated to Smashburger.

An honest mistake? We hope, but in some cases it could be a costly one. Timely amendments to a company's FDD are crucial, showing material changes within the franchise system, changes that perspective buyers should be aware of before making their educated decision to invest.

Most franchisors pride themselves in their carefully chosen brand name and trademarks for what the franchise stands for, showcasing their system in front of investors as a franchise company that takes pride in being accurate, professional and attentive. The name of a company can be a powerful tool. It signifies a particular brand and what it stands for in an overly competitive market. When filed with registration states and the Federal Trade Commission, franchising's governing bodies, franchisors want their Franchise Disclosure Document to be truthful in front of regulators.

The troubled Smashburger chain was recently required by state and federal franchise regulators to amend its franchise disclosure documents after it terminated many of its top executives and management employees on December 1, 2016. A spokesperson for the Minnesota Department of Commerce, Franchise Division, told Blue MauMau that any "material" changes, including changes in companies' top executive officers and staff, are required to be reported within a 30-day period in an amendment to its FDD. On January 6, 2017, Blue MauMau reported that Smashburger amended its FDD with California Department of Business Oversight, effective December 29, 2016, through its outside counsel Michael Daigle of Cheng Cohen.

The same amendment was not made at that time to Minnesota's franchise regulators, after many checks to the state's website, Minnesota CARDS. It showed no amendment had been made until last week. Smashburger's amendment is now recorded, dated December 29, 2016, under the date January 13, 2017, by attorney Daigle of Cheng Cohen.

Unfortunately, the most egregious blunder could lie with the Minnesota Department of Commerce, one of 15 states that require franchise registration, in not catching the error. The government agency ensures that both franchisors and franchisees are protected from unscrupulous operators in the state. Minnesota prides itself in reviewing FDDs, whether they are initial documents, renewals or amendments, and enforcing franchise laws.

UPDATE: As of this afternoon, the 2017 Smashburger amended FDD has been removed from Minnesota CARDS website.


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About Janet Sparks

Janet Sparks's picture

Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.