Please enjoy this guest post from The Franchise King®, Joel Libava.
I’m sorry. The sarcastic part of my brain took total control of me when I wrote the headline you just read. It won’t happen again. Right.
The document I’m about to teach you about is actually one of the most boring documents ever invented. But, it’s so darn important.
The Franchise Disclosure Document (FDD) is a legal document that franchisors must furnish to prospective franchisees, by law. The Federal Trade Commission (FTC) is the regulatory body that enforces it. That makes it kind of a big deal.
The FDD contains information…facts and figures on the franchise business opportunity, and is provided to help you analyze the offering.
You, as a prospective owner of a franchise, must receive the FDD at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for and get a copy of the disclosure document once the franchisor has received your application and agreed to consider it.
Most franchisors will furnish this to you well before you are at the decision stage. Some don’t provide the FDD until later in the process. I have an opinion on that, and it’s included in my eBook*, “How to Carefully Select and Properly Research a Franchise.”
“This is an important document, and it is required by the Federal Trade Commission. Some franchise company’s send it to you with the marketing materials, some send it after the initial conference call, and some send it to you after they take a look at your formal application. Some, however, don’t disclose the FDD until you visit the franchise company’s headquarters in person. Although not very common, this practice can be unsettling. In my experience, if the franchisor won’t send you their FDD early in the process, there’s a reason. There may be some negative information in the document that they would prefer to explain to you in person. Maybe they just like to disclose you in person. Personally, if a franchisor insists on disclosing their FDD very late in the process, I would walk away, unless they, without argument, agree to send it sooner. “
That’s my own opinion, but it’s your choice whether to walk away and start searching for another franchise opportunity, or to stick with the one in question.
What’s Included In The FDD
The following items are included in the FDD, by law:
- The Franchisor, its Predecessors, and its Affiliates
- Business Experience
- Initial Franchise Fee
- Other Fees
- Initial Investment
- Restrictions On Sources Of Products And Services
- Franchisee’s Obligations
- Franchisor’s Obligations
- Patents, Copyrights and Proprietary Information
- Obligation To Participate In The Actual Operation Of The Franchise Business
- Restrictions On What The Franchisee May Sell
- Renewal, Termination, Transfer And Dispute Resolution
- Public Figures
- Earnings Claims
- List Of Outlets
- Financial Statements
As you can see, there’s a lot to go over.
4 Things To Focus On
I’d like to share what my Dad taught me about the most important things for prospective buyers to focus on in the FDD.
1. Franchisor’s Business Experience
You’re going to want to know what the backgrounds of the executives are, and what they bring to the table, experience wise. Hopefully, you’ll be super-impressed with their credentials.
If there are a number of lawsuits contained in the FDD, there may be a problem. Were there legal actions taken by ex-franchisees towards the franchise company? Or, were there lawsuits in which the franchisor sued the franchisees for not paying royalties?
Important: If you’re interested in a franchise concept that has 120 franchises in existence, and, according to the FDD there are 10 lawsuits showing, in my opinion that’s a lot. It is certainly something you’d want to bring up with the franchise development representative.
Have any of the franchise executives filed for bankruptcy? If so, why? It will be disclosed, and it could be cause for concern. Did they start or involve themselves with a franchise concept in the past that went under? Find out.
4. Earnings Claims
Some of my fellow franchise professionals think earnings claims are important…really important. More important than anything else when it comes to the FDD. I’m not in that club.
Some franchisors disclose facts and figures-dollar amounts, about their franchisees. These claims may be in the form of individual franchise unit gross sales, gross sales broken down by years in business, or they may show gross or even net profit figures. If you’re investigating an opportunity that does disclose earnings that’s great. If you’re investigating an opportunity that does not disclose earnings claims, that’s okay, too. Here’s why: You’re going to be calling individual franchisees as part of your research, anyway. I guarantee you’ll be asking them about their incomes. (There’s a right way to do it and a wrong way. I show you exactly how to do it…correctly, so you don’t scare them off, in my eBooks…and in my hardcover book.) Why would you only rely on information contained in a document that’s so infested with legalese…
The point is this: The information contained in the FDD is crucial. You just need to verify what’s in it with the franchisees. They’re living the business. The franchise business you may end up being involved with.
The FDD may not turn out to be the most exciting document you’ve ever read, but if you’re serious about becoming the owner of a franchise, it will turn out to be the most important thing you’ve ever read.
*If you’re interested in purchasing my Franchise eBook, “How To Carefully Select And Properly Research A Franchise,” Nellie Akalp, The CEO and Founder of Corpnet, has just arranged a special discount for you.
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