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 have decided to consider a franchise seriously, you’ll be given a Franchise Disclosure Document, or FDD as we call it in the franchising world. While the document may not be a light read, it is a comprehensive overview of the franchise business and contains vital information. Let’s take a deeper look at the document.
What is a Franchise Disclosure Document?
The FDD is a 23-part document that reviews the franchisor’s history, the company structure and legal history. It also contains 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 walk-through of the FDD with a franchise development representative as part of the sales process. We do this to ensure you fully understand the material in the document and have the opportunity to ask any questions you might have.
When do you receive the FDD?
According to the Federal Trade Commission, franchisors are required by law to provide an FDD to candidates. They must provide it “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.”
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, so you thoroughly know what you’re committing to and have a true understanding of 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 and 4 review any litigation or bankruptcy history the company may have. Information in these sections should raise a red flag. It could indicate problems with that company’s system, both for the franchisor and the franchisees.
- Items 5 through 7 outline the franchise fees, initial investment, and other deposits. Perhaps the most important items to prospective owners, these sections help set financial expectations and give a good idea of how much a particular franchise will cost both up front and down the road.
- Item 19 tells the potential franchise owner the financial performance representation of the business. The biggest question potential franchisees have is “How profitable is buying a franchise?” This section breaks down the profitability of the business so people have a better understanding of the financial side of the business.
- 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 as a potential franchisee to make sure you’re comfortable with the information and fully ready to move ahead into franchise ownership.
If you’re interested in a low-cost franchise with a recurring revenue model in an innovative industry, check out the Pool Scouts franchise opportunity for more information.