When buying a franchise, the franchise disclosure document is one of the most important elements of the process, so it’s important to know what to expect and what to look for.
What It Is
The Federal Trade Commission requires all franchisors to provide this document and include 23 specific elements about the franchise, its officers, and franchisees. It’s this document that will help you get to know the franchisor and decide if it’s the right fit for you.
You should get this document at least 14 days before the sale. Ask for it as early as possible so you have time to read through it.
Why You Should Care About a Franchise Disclosure Document
Starting any type of business requires due diligence. It’s up to you to do your homework and understand the benefits and drawbacks of working with a particular brand. And you can get all the information — for better or worse — in this document.
Because every potential franchisee receives a copy of this, you will have all the information you need to make a fair assessment of the company, including:
- Background on the franchisor
- Costs associated with the franchise
- Legal obligations of the franchisor and franchisee
- Any bankruptcies or litigation against the franchisor
- Statistics on existing locations
- Potential revenue for franchisees
- Audited financial information
Getting Help in Deciphering the Disclosure Document
This isn’t light reading; franchise disclosure documents can be 100 pages or more. But don’t decide to skip the review entirely just because of its heft. Having an attorney well-versed in franchise law take a look at the franchise disclosure document can help you better understand it, and he can make recommendations based on what he learns from it.
Specific Points to Pay Attention To
If you had to pick a few of the 23 elements to really zero in on, those will likely be any involving red flags (such as lawsuits against the franchisor or bankruptcy) as well as details on how much you can potentially make as a franchisee.
If you find anything that sends warning signals, go beyond the franchise disclosure document to get more information. If, for example, a franchisee sued the franchisor, see if you can get records or interviews on the reason for the lawsuit. You want to go into this situation knowing everything possible and prevent any potential nasty surprises once you’re up and running as a franchisee.