Navigating The Franchise Disclosure Document
Investing in a franchise is no easy decision and one you shouldn’t take lightly. Sure, franchising is a smart way to be your own boss without having to go it alone. But there is a lot of information to navigate to ensure you’re choosing the franchise that’s right for you. Once you’ve decided to consider a franchise seriously, you’ll be given a Franchise Disclosure Document (FDD). While the document may not be a light read, it is a comprehensive overview of the franchise business and contains some vital information. Let’s take a deeper look at the document.
What is It?
The FDD is a 23-part document that reviews the franchisor’s history, the company structure, legal history, financial agreements and payment schedules, existing franchisees, and mutual expectations, among many other things. While prospective franchisees are encouraged to review the FDD with an experienced lawyer, this may not be realistic for everyone. Fortunately, franchise companies like Pool Scouts include a walkthrough of the FDD with a franchise development representative as part of the sales process to ensure you understand the material in the document and have an opportunity to ask any questions.
When do you receive it?
According to the Federal Trade Commission, franchisors are required by law to provide an FDD to candidates “at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.”
Why Is the FDD Important?
The FDD is meant to protect potential franchisees by putting everything on the table. It is important to review the document thoroughly and capture any questions or concerns you have about the business.
What Should You Pay Attention To?
While the FDD in its entirety is important, there are several sections that warrant a bit more attention.
- Item 1 gives a detailed background of the franchise, its company structure, and overview of the industry. This will give you a general idea of how the franchise has grown, what it values, and how it’s organized.
- Items 3 & 4 review any litigation or bankruptcy history the company may have. Any information in these sections should raise a red flag. It could indicate problems with that company’s system, both with the franchisor and the franchisees.
- Items 5-7 outline the franchise fees, initial investment, and other deposits. Perhaps the most important items to prospective owners, this section helps set financial expectations and gives a good idea of how much a particular franchise will cost both upfront and down the road.
- Item 20 provides information about franchises and basic details about their business.
The bottom line is that the FDD is a key part of the investment process. There are a number of articles about the FDD and key things to keep in mind. Franchisors are required to provide the document in an effort to be transparent, and it is your responsibility to make sure you’re comfortable with the information and ready to move ahead.
If you’re interested in a low-cost franchise with a recurring revenue model in an innovative industry, check out the Pool Scouts Franchise website for more information.