The Franchise Disclosure Document
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Read and review before you buy a franchise
The Franchise Disclosure Document (FDD) – All franchises are required to provide you with an FDD. This document provides valuable information regarding all
Read the fine print and review with a qualified franchise attorney
aspects of the business including costs, responsibilities for both you and the franchisor, etc. It’s highly recommended you review the FDD with a qualified franchise attorney. The following is an overview of some of the important items in the FDD. FDD Guide – Review The FDD When Buying A Franchise.
Franchisor’s Background – FDD Item 1 – Item 1 provides the details and history of the franchise. It discusses how long the franchisor has been in business, competition, and any special laws that pertain to the industry including license or permit requirements.
Business Background – FDD Item 2 – Item 2 provides the background of the executives of the franchise system and describes their experience. It’s important to learn about their general business backgrounds, their experience in managing a franchise system, and how long they’ve been with the company.
Litigation History – FDD Item 3 – Item 3 discusses prior or current litigation involving the franchise as well as if the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for—or settled civil actions involving—the franchise relationship. This section should also say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system.
Bankruptcy – FDD Item 4 – Item 4 discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy.
Initial and Ongoing Costs FDD Items 5, 6 & 7 – These sections describe the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. It’s important to have a clear understanding of the costs associated with the franchise operation.
Restrictions – FDD Item 8 – This section will discuss the restrictions on sources of products or services. A franchise may have negotiated discounts for inventory items. It’s not uncommon for the franchisor to place restrictors on where you can purchase your inventory and supplies. This is a way for them to maintain quality control. Restrictions may include:
Suppliers from whom you may purchase goods
The goods or services you may offer for sale
Your customers and where you can sell goods or services
Your use of the Internet to sell goods or services to customers in and out of your territory and the right of the franchisor (or other franchisees) to use the Internet to solicit customers or to sell in your territory
These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet. That said, if the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers, either by establishing their own outlets, or by selling to customers in your area through the Internet, catalogs, telemarketing, and the like. It’s advisable to attempt to negotiate an option to purchase outside the network if you can obtain a better price, provided there’s no sacrifice in quality.
Franchisor’s Assistance, Advertising, Computer Systems and Training – FDD Item 11 – This item provides an overview of the franchisor’s training and assistance program. You will want to understand:
Who is eligible for training? Are permitted to have additional people trained?
If new employees are eligible for training and if there is an additional cost.
The details and time frame of the training.
The details of ongoing training, if any, and at what cost
The details of on-going support.
The training you need will depend on your business experience and your knowledge of the franchisor’s goods and services. If you have doubts or concerns as to whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.
Advertising – Franchisees often are required to contribute a percentage of their gross sales to an advertising fund. You will want to understand.
The percentage of the advertising fund is devoted to administrative costs.
If franchisees have any control over how the advertising dollars are spent.
What percentage of the fund is spent on national advertising.
What percentage of the fund is spent on advertising in your area.
What percentage is devoted to selling more franchises.
Whether all franchisees contribute equally to the advertising fund.
Territory – FDD Item 12 - When purchasing a franchise you might be entitled to a protected territory. You will want to make sure your protected territory is sufficient to support your business. In addition you will also want to determine that the franchisor or other franchisees may not seek business or compete within your assigned territory.
Termination & Renewal – FDD Item 17 – This section spells out the conditions under which the franchisor may end your franchise and your obligations to the franchisor after termination. It also defines the conditions under which you can renew, sell, or assign your franchise to others.
Franchise Performance Representations (FPR) – FDD Item 19 – This is the only area where a franchise is permitted to
Understand the details of the Item 19
provide any information on expected earnings. While this can be very helpful, it’s only part of the equation. It’s important for you to prepare a detailed business plan and review it with your CPA or financial advisor. It’s estimated that only 30% of franchises provide and FPR.
Current and Former Franchisees – Validation - The FDD will include a list of current franchises and franchisees who are no longer part of the system. During your due diligence it’s best to speak to a number of franchisees to see if they are happy with the franchise. For more information on franchisee validation please click this link.
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