The Franchise Disclosure Document is a standard document that serves as the basis for your franchise business contract. It also allows you to compare franchise business opportunities more easily, because every franchisor must fill out the same basic information.
But it can also be an overwhelming documents, and it is in many ways designed as a sales tool, so it’s not as simple as you might think. Let’s get to know the FDD better.
About the franchisor
The first items on the FDD are information about the franchisor.This section gives you a chance to gauge the stability of the franchise and to determine whether these are people you want to work with. It makes sense to Google all the information you find here, just to confirm that you’re getting the complete picture and to find any other points of view you might want to consider.
- Item 1 gives the history of the franchise and any special laws or other information that apply to the industry.
- Item 2 introduces the executives and tells about their backgrounds and qualifications.
- Item 3 lists any lawsuits or convictions against the franchisor, as well as any lawsuits they’ve brought against their franchisees. Realistically, large corporations often have history in the courts, so seeing something in this item shouldn’t automatically be a deal-beaker.
- Item 4 lists recent bankruptcies. This one is worth taking a second look at.
This section should make it clear how much money the franchisee needs to put in. Many people approach this section with excessive optimism, thinking that they won’t really need as much as the estimates. Chances are, you will need this much money. Ask current franchisees how much they spent, too.
- Item 5 details the initial franchise fee and ongoing royalties.
- Item 6 lists other costs, including marketing and ad fees. This section also describes the training and support offered by the franchise.
- Item 7 gives the estimate of the franchisee’s initial costs.
The next section, Items 8 through 17, goes into the franchisor’s expectations of the franchisees. If you are required to use specific suppliers, if there are trademarks and patents to be guarded, if the franchisee has to be on the premises and taking part in the everyday operations of the franchise, this is where you will find out.
Since these elements of a business will vary enormously from one industry to another and from one company to another, it’s worth having a lawyer look over this section to make sure that you fully understand all the rules.
This is also the section where you’ll see the franchisors’ expectations about how the relationship will end, including whether you can expect to renew if there were no problems, whether you’ll have a non-compete clause if you don’t renew, and whether you can sell your franchise to someone else.
This section contains the items that most often lead to conflict between franchisor and franchisee. If a salesperson says, “Don’t worry about that — that’ll never come up,” remember that you are bound to anything you agree to with your signature.
Item 18 details any celebrity involvement.
This section tells how the franchise is doing… to an extent. Item 19 gives data on franchise performance and Item 20 lists current and former franchisees. Franchisors have a lot of flexibility on how they share information here, and they are not required to disclose much information.
Item 21 is an audited financial statement. This is another part of the document that can benefit from a lawyer’s input.
The last section of the document includes contracts and the franchisee’s acknowledgement of having received the document.
Breaking down the document in this way can help you get the main thrust of each section and understand the document more fully.