Franchising requires trust. At some point, the franchisor is expected to disclose the “secret sauce” and the franchisee must keep this information secret. However, conflicts about the timing can arise.
From the standpoint of the franchisee, learning proprietary information early in the franchise disclosure document can help the franchisee evaluate the franchise’s price. On the other hand, the franchisor’s interests are best served by delaying disclosure as long as possible to ensure that the franchisee is fully committed to the franchise before learning its secrets.
Here’s how you can best disclose proprietary information in a franchise agreement and franchise disclosure document to address both parties’ needs.
What Proprietary Information Should You Disclose in a Franchise Disclosure Document?
Ideally, none. As a franchisor, you must keep proprietary information confidential for their legal protection. Proprietary information disseminated without proper controls will no longer receive trade secret protection.
However, the disclosure of your proprietary information may be possible if you lay some groundwork before disclosure.
- Identify what is being requested: In conducting its due diligence, the franchisee will want to know what its franchise fee buys. The franchise disclosure document aims to identify the key deal points. The franchisee will almost always ask for as much information as possible.
- Determine whether you can meet the request without disclosing proprietary information: It is possible, in fact likely, that the franchisee does not expect you to give away all your secrets in the franchise disclosure document. Instead, the franchisee might just be looking for general information, like “eight recipes for the following dishes” or “the annual marketing plan,” without expecting their actual copies. Under federal regulations, the franchisor is only required to describe the “general nature” of the proprietary information.
- Enter a non-disclosure agreement (NDA) if you have not already done so: If the franchisee insists on seeing proprietary information, and this is not a deal-breaker, an NDA might protect proprietary information from misuse by the prospective franchisee. One way to ensure fairness is to make the NDA mutual so that neither party can use, or misuse, information gained during due diligence.
What Proprietary Information Should You Disclose in a Franchise Agreement?
Everything, at least everything that is to be used by the franchisee in the system. A reference to proprietary information in the franchise agreement can be disclosed in a separate document after an official agreement is made. If a franchisor grants a license to use proprietary information but does not disclose it, the contract might be invalid for failure of consideration.
Disclosure of Proprietary Information is Not Inevitable
A clever franchisor might develop a relationship with its franchisees in which no proprietary information needs licensing. This type of franchise is referred to as a product distribution franchise. For example, rather than telling a franchisee how to make the “special sauce,” a franchisor might require the franchisee to buy the “special sauce” from the franchisor’s vendor. That way, there is no need to disclose the proprietary information in either the franchise disclosure document or franchise agreement.
Contact us to discuss your franchising transaction whether you are a franchisor or a franchisee.