The Opportunity
A quick serve restaurant franchisor backed by a private equity firm, faced growing exposure tied to its Franchise Disclosure Document (FDD) — specifically Item 19, the section disclosing average franchisee earnings and same-store sales figures.
As part of its growth strategy, the private equity ownership had pushed for an aggressive Item 19 disclosure to attract more prospective franchisees. A strong earnings figure makes a brand more appealing to someone comparing franchise opportunities, the same way a prospective owner might weigh a fast-food franchise against an auto store franchise based on projected gross profit.
The risk: those projections didn't always hold up. In the case of a quick serve restaurant concept, seasonality hit hard. Cold, snowy months with poor road conditions meant sharply reduced sales. Franchisees who had left stable careers expecting to earn what Item 19 implied instead found themselves earning a fraction of that, and in some cases operating at a loss.
When actual results fell well short of disclosed projections, franchisees turned to franchisee-side litigation attorneys and filed claims against the franchisor. These claims flowed directly to the franchisor's Errors & Omissions (E&O) coverage, the same policy the insurance carrier underwrites based largely on the strength and compliance of the FDD language itself. Our client's existing FDD contained wording the carrier viewed as a meaningful liability, creating friction in the underwriting relationship and driving up cost of coverage.
The Strategy
We worked collaboratively across three parties: the insurance carrier, the private equity firm, and the franchisor to directly address the language the carrier flagged as high-risk within the FDD.
Rather than treating the FDD as fixed, we facilitated a revision process to bring the disclosure language into closer alignment with what the carrier determined would adequately protect against future claims exposure. This meant reworking how earnings and same-store sales projections were presented, reducing the gap between marketed potential and realistic, defensible outcomes.
With updated, carrier-aligned FDD language in hand, we then took the improved risk profile back to market to remarket the franchisor's E&O program.
The Results
We successfully revised the FDD language to satisfy the insurance carrier's underwriting concerns, resolving the friction point that had been driving up the client's cost of coverage. With that improved risk profile in hand, we remarketed the franchisor's E&O program to the carrier. As a result, the client saved $100,000 on their franchisor's E&O insurance coverage.
