Understanding your Franchise Disclosure Document is critical to success.Once you’ve chosen to pursue a franchise, done some research, and begun the process of potentially becoming a franchisee, you’ll receive what is arguably the most important document of your entire franchising process: your Franchise Disclosure Document (or FDD).
A standard FDD has 23 separate items detailing a wealth of information about the franchisor. It is important that you understand the form and composition of this legal document is standard with any franchisor and must include information on a variety of topics. The major subject areas will include:
1. The Franchisor, Parents, Predecessors, & Affiliates
This information will help you understand who the franchisor is, how long they’ve been in business, potential competitors, and other affiliated companies.
2. Identity & Business Experience of Key Persons
Have any interest or curiosities around the key stakeholders? That info can be found here.
3. Litigation History
This section should be paid close attention to! Nothing to report? Good. If there is some litigious history here, take note and do your research before agreeing to buy into a company with a potentially costly legal battle going on.
For obvious reasons, this section is also critical. If there is a bankruptcy on record, this may be enough to make you reconsider your purchase.
5. Initial Franchise Fee
You likely already understand the fees laid out by the franchisor, but this is a good place to find any potential costs that you haven’t discussed.
6. Other Fees & Expenses
This is where your franchisor will outline line-by-line the fees associated with other areas of the business, like requisite trainings, marketing expenses and royalties.
7. Franchisee’s Estimated Initial Investment
This section will tell you what the franchisor expects your initial investment to be. Keep in mind that this is just an estimate, and it may be altered to fit your needs. However, this data is collected by the previous franchisees that incurred from when they began investing in this business so they are not guesstimates, but simply averages.
8. Restrictions on Sources of Products and Services
These are The Rules you will need to follow to continue participating in the franchise. There won’t likely be any surprises in this section, but the details are important to take note of, as you may be dismissed from the franchise if you don’t abide by them.
9. Obligations of the Franchisee
This section is similar to section 8; take note!
10. Financing Arrangements
This section will let you know what financing arrangements are acceptable to the franchisor, or whether the franchisor themselves are comfortable providing financing for any of your franchise-related business expenses. Don’t forget working with a franchise business expert can help you gain this knowledge and introduce you to funding specialists that understand the rules and regulations surrounding this and can even help you understand your funding options.
11. Obligations of the Franchisor
These are the benefits that the franchisor is legally responsible to provide you with (like marketing, training, support, etc.). Remember, this is a give and take from both parties – a business marriage. It is meant to be a profitable partnership.
This defines the borders of your particular franchises business area and will explain whether or not you are provided an exclusive territory to conduct your business within.
Discloses any trademarks held by the franchise that you will be privy to and have access to.
14. Patents, Copyrights, and Proprietary Information
See section 13.
15. Obligation of Franchisee to Participate in the Actual Operation of the Franchise Business
If your intention is to be a semi-absentee franchisee (or have a manager-run business), this section is very important for you to read. It will define the expectations of the franchisor for your personal participation in the day-to-day operations of your franchise.
16. Restrictions on Goods & Services Offered by the Franchise
Defines the flexibility of the franchise when it comes to offering independent goods and services.
17. Renewal, Termination, Repurchase, Modification, and/or Transfer of the Franchise Agreement, and Dispute Resolution
This section is very important to note. It will inform you of your exit strategy, term of your agreement and cost related to renewing.
18. Public Figures
This section will discuss any public figures or spokespeople that are associated with the franchise.
19. Financial Performance Representations
This is where your franchisor will show you earnings potential currently happening with your specific franchise interest. Note that this is not mandatory and some franchisors will choose not to include an Item 19. It is important to understand why if this is not included in their disclosure document to you.
20. List of Franchise Outlets
This defines your network; take note! There will be lots of information about current and former franchisees as well as projected growth here.
21. Financial Statements
These documents should help you determine whether a franchise has steady growth, has a sustainable growth plan and if it devotes enough of its revenue to supporting franchisees.
23. Acknowledgement of Receipt
This document governs the future relationship if you were to be awarded and accept to become a franchise owner and partner with this franchisor. Approaching this document in a strategic manner so you can understand each section and item is key to a successful partnership. Don’t let it overwhelm you, working with an expert to help you create a plan to approach this document the right way is vital to your investigation process.
Careyann Golliver is America’s Franchise Matchmaker™ and the Founder of Franchise Logic. She is a business consultant in Denver, Colorado with over two decades of experience in entrepreneurship and franchising, she can provide critical feedback and guidance. Contact Careyann today or call 303.805.5078.