Do you fully understand what’s involved in a Franchise Disclosure Document? Meredeth S. Jones shines a light on the 23 items of this essential document
A standard, yet critical, document you will hear referenced throughout the exploration of franchise ownership is the Franchise Disclosure Document (FDD). Prior to 2007, this document was known as the Uniform Franchise Offering Circular (UFOC).
What is a FDD? This is a legal document every Franchisor must provide to prospective Franchisees prior to the sale of a franchise. This document is updated every year and essentially is a reporting of the franchise’s previous years activities and general history.
Let’s take a detailed look at these 23 items so that you, as the potential buyer, can have a better understanding of your rights and responsibilities contained in this document.
Items 1-4: Franchisor information.
I like to call this the “get to know” the Franchisor section. Within these four items you will find:
Trade, business entity, address
Detailed information on predecessors or affiliates
Franchise description
Names and bios of executives, directors and high-profile employees as well as any lawsuits or bankruptcies these individuals may have been involved with.
Items 5-7: Costs and fees.
Pretty self-explanatory. What is the initial investment I should budget for and what are the ongoing fees?
Franchise fee
Royalties & marketing fees, how these are paid to the Franchisor and frequency of payments
Estimated initial investment (breakdown of costs associated with opening the business)
Item 8: Product and service restrictions.
This is more of a vendor call-out.
Expenses associated with required vendors and services you would be required to use
Whether the Franchisor is getting a kick-back from these vendors
Is the Franchisor charging a mark-up on required products or services you may have to purchase directly from corporate.
Item 9. Franchisee obligations. What am I required to do?
Table outlining your obligations as a Franchisee and a reference to where these specific requirements can be found within the rest of the FDD and specifically within the franchise agreement, which governs the relationship.
Item 10. Financing.
Is the Franchisor offering any financing options?
If the Franchisor is offering any type of partial or full financing, terms, finance charges, interest rates and number of payments & penalties for default will be listed here.
Item 11. Franchisor obligations.
What is the Franchisor required to do for me? Types and amount of support a Franchisor provides for its Franchisees such as:
Site selection
Training program details
Advertising/marketing fund uses
Ongoing support and more
Item 12: Territory.
What radius of protection do I receive around my business?
This item details a Franchisee’s exclusive rights to an area as well as potential franchise relocations and any Franchisor plans for establishing competing franchise systems that could impact your business
Items 13: Trademarks.
Franchisee usage of these marks.
List of registered trademarks, under the U.S. Patent and Trademark Office
Any pending litigation regarding the use of the trademarks
Any restrictions on use
Item 14: Patents, copyrights and proprietary information.
Also, Franchisee usage.
List of patents and copyrights
Any restrictions on use
Item 15: Obligation to participate
– in the actual operation of the franchise business. These are the requirements imposed by the Franchisor on the Franchisee regarding the day-to-day business operation.
Specifics of how much, if any, time you will have to dedicate to running the business
Item 16: Restrictions on what the Franchisee may sell.
This is the consistency section. Your customers like the consistency of a franchise. No matter where they go, if they see your brand, they know what to expect.
Limits set on what you can sell out of your business
Item 17: Renewal, termination, transfer, and dispute resolution.
This is one of the most important sections in the FDD which provides you with a table of important information cross referenced with direct information from the franchise agreement, you will be required to sign as a Franchisee.
Your rights as a Franchisee to
Renew after the initial terms
Terminate
Transfer
Item 18. Public figures:
Although not a critical item, interesting nonetheless.
Payments to any public figures for promoting the brand
Item 19. Financial performance representations.
As potential candidates often ask, “how much money can I make?” This is the section we, as sales professionals, direct them to. One of the most crucial, in my opinion. What you actually see will vary as Franchisors tend to present this information in different ways. What actually is included?
Gross sales
EBITDA
Financial metrics.
*Remember, Franchisors are not allowed to make financial representations unless it is contained in Item 19.
Item 20. Outlets and franchise Information.
A great indicator on the health and sustainability of a brand. A, 5-table summarization of the franchise’s activities over the last 3 years for corporate and franchised locations.
Openings
Closings
Transfers
Terminations
Total number of locations
Item 21. Item 21 requires disclosure of the Franchisor’s financial statements
from, at the very least, the two previous years that have been audited under standard accounting practices. Parent companies or affiliated companies may also be included. A new/start-up Franchisor may have limited information.
Item 22. Contracts. This contains all of the documents you would be required to sign as Franchisee. These should be read very carefully and fully understood.
Franchise agreement
Amendments
Finance documents, where applicable
Lease rider, where applicable
Last but not certainly not least, we get to the last item in the Franchise Disclosure Document. This is the easiest for potential buyers to digest.
Item 23. Receipts.
This receipt is an acknowledgement that you have received the FDD. Before a candidate can sign the franchise agreement or pay any monies to the Franchisor, they must be in receipt of this document for a minimum of 14 days. The signature/date triggers this 14 day count down.
Consider the FDD one of the most crucial factors in deciding if a particular franchise is the right business opportunity for you. I strongly recommend for anyone reviewing, if you do not understand all of the rights and responsibilities contained within this document, hire a Franchise Attorney to decipher the legalese. Also, pass along to your CPA for review of the financial sections. The CPA can have a better understanding of your rights and responsibilities contained in this document
ABOUT THE AUTHOR
Meredeth S. Jones, CFE is the Founder of two chicks consulting, a boutique consulting firm, providing franchise sales & development, lead generation strategies, systems/processes set-up and improvements to Franchisors. She uses her change agent expertise across multiple industries to help streamline operations, increase overall store count, and improve Franchisor profitability. Due to Meredeth’s diverse franchise experience, she is uniquely positioned to also provide consulting services to Entrepreneurs looking to own their own business. https://www.linkedin.com/in/meredethsjones/
