If you’re getting close to purchasing a franchise, they’re going to send you a Franchise Disclosure Document (FDD). It’s mandated by the Federal Trade Commission that you get it at least two weeks before you sign your franchise agreement, so you’ll have plenty of time to look it over.
The Franchise Disclosure Document can be quite long and complicated – it was written by attorneys after all. It can be hundreds of pages and the language can be impenetrable. But it still has lots of information you need to make a decision about buying your franchise.
Here’s a breakdown of each item in the FDD:
Item 1
This is the history of the ownership and corporate family of the franchisor. You should already know most of this information from your prior research, but be sure to lookout for red flags like multiple changes in ownership over a short period of time. Also, this will be your first introduction to this document, if it uses difficult language or is muddled, it could mean the whole FDD is written this way. Be sure to get your lawyer involved to look everything over, and don’t sign until you’re sure you understand each part of it.
Item 2
This is where you find out what business experience the franchise executives bring to the table. You want to see a strong group with lots of experience. Having a new team or a group with no franchise experience could be something you want to investigate further.
Item 3
This is a biggie. This tells you about any litigation against the company. Be aware that it’s not unusual for even small franchises to have a case or two listed here. You can also find out if they’ve filed any suits, including against their franchisees. If you see multiple suits filed by franchisees against the franchisor, and vice versa, this is a huge red flag. You also need to look for any big or class action suits that could do damage, or potentially bankrupt the company. If you see something you don’t like here, don’t hesitate to walk away and find a franchise that’s more stable.
Item 4
These are bankruptcies, but your due diligence prior to this should have told you if the company was about to file bankruptcy. But they’re also required to list if any of their key people have filed for bankruptcy. That could definitely be worth a question or two.
Item 5, 6 and 7
This is an overview of your fees. Not too long ago, these fees were non-negotiable. But times have changed. Look at this area to see if fees are listed as a range. If so, it’s possible you could qualify for a lower fee. You’ll also find your royalty and advertising fees, as well as the overall fees and expenses to operate your franchise. This area should give you a clear picture of how much it will take for you to open a franchise. However, things happen in business, so you should always plan on having some extra cash in your budget in case something goes wrong while you’re setting up. Also, don’t assume you turn a profit day one. You’ll need to have a cushion in case you don’t open with a bang.
Item 8
You know that as a franchise owner you need to keep everything up to your franchisors standards. This is the section that lays out those standards. This could mean they insist you work with designated suppliers or they may sell you certain products themselves. Make sure you’re aware of your obligations in regards to products.
Item 9
Speaking of obligations, this is where you’ll get a list of all of your contractual obligations as a franchisee. Make sure you cross-reference this with your franchise agreement to make sure everything is consistent and you’re aware of what’s expected.
Item 10
If you’re short on capital, this is the area where you’ll find out if you can borrow from your franchisor or if they have a lending program they recommend.
Come back next week to read the breakdown of the other half of the Franchise Disclosure Agreement.
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