Congratulations!!!! You have made it so far and you are about to embark on your entrepreneurial journey. However, its time to be very careful as you will make one of the most important investments of your life. Till now you must have heard about FDD at various meetings, expositions or from franchise advisors. This is the most important legal document that covers most information about the franchisor that may not be public and is required to run the business. It will enable you to make a decision of whether to invest in the business opportunity or not. You must receive the franchisor’s FDD at least 14 days before signing any contract or paying any money to the franchisor. FDD provides details about the business model that can good or bad. You should take FDD very seriously as it provides crucial information that will have a long-term impact. Some important items to look for in FDD:
- About Franchisor
An overview of ownership, the corporate team of the franchisor, competitor, and laws in industry. It helps to identify costs and risks.
- Business experience of franchise executives It explains about the leadership of the company
Any litigation involving the company and its principals and directors are mentioned. It mentions any potential claims against the franchisor and any lawsuit against companies infringing on its trademarks. This item tells a lot about company’s health.
It shows any officer or director who has a personal bankruptcy or was previously involved in a bankruptcy.
- Initial fees, other fees, and initial investment
The initial fees required to open your franchise, other fees include royalty and advertising fees, and initial investment required to open and operate the business for 3 months.
- Restrictions on sources of products and services
The franchisor may sell you products itself or insist you use designated suppliers.
- Franchisee’s obligations
It lists your contractual obligations, with cross-references to the franchise agreement and the rest of the FDD.
This tells you whether the franchisor offers a lending program, or whether the franchisor has deals with lenders who have agreed to help finance its franchisees.
- Franchisor’s assistance, advertising, computer systems and training
It describes the content and scope of the franchisor’s support services. The information or franchisee data to which the franchisor has access.
You would want to know that another unit cannot open within a certain radius.
- Patents, copyrights and proprietary information
- Obligation of franchisee to participate in the actual operation of the franchise business
- Restrictions on goods & services offered by franchisee
- Renewal, termination, transfer and dispute resolution
Mentioning terms of termination and renewal and where and how disputes will be resolved.
- Financial performance representations
This is one of the most important pieces of the FDD, however around half of franchise provide information about earnings of other franchise and it can also be misleading. Be very careful in analyzing this information as average and gross figures are not actual representative.
- Outlets and franchise information
The number of franchises opened, transferred and closed in the last three years.
- Financial statements
Information about company’s financial status reflected through audited financial statements. Check explanatory notes in detail.
- Contracts and receipts
It includes the contracts you have to sign and the receipt you must sign when you receive the FDD.