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Franchise Focus: Understanding the FDD

Posted on: March 07, 2016 | Author: ATB Business & Agriculture

As you investigate the possibility of opening a franchise, you will hear a lot about the Franchise Disclosure Document (FDD). Here are some of the features you will see in it.

  1. Franchise company
    Learn about the history, ownership, type, corporate family, and franchises.

  2. Business experience of executives
    Outlines the business experience of the executives. Make sure you’re comfortable dealing with them.

  3. Litigation
    This will tell you if there are pending lawsuits or if franchisees have filed lawsuits against the franchisor.

  4. Bankruptcy
    Check to see if any officers or directors have filed for personal bankruptcy. Ensure that the franchisor is not in bankruptcy.

  5. Fees
    Look at the initial fees required to open the business. If there is a range, ask if you qualify for the lower fees. What are the ongoing fees (advertising, royalties, etc.) and do you feel comfortable with them?

    The working capital amount is a suggestion, so you may want to budget more to be safe. Before signing the FDD, we recommend you go over these fees with your accountant. TIP: Ask other franchisees how long it took them to break even!

  6. Restrictions on products and services
    Often the franchisor requires you to buy products from them or designated suppliers.

  7. Franchisee’s obligations
    Cross-reference the list of contractual obligations with those in the Franchise Agreement. They should be the same.

  8. Financing
    Franchisors often have established relationships with approved lenders. Remember, if you default on your loan, the franchisor has the right to terminate your agreement.

  9. Franchisor’s assistance
    Outlines the extent and scope of the franchisor’s support services. It should include disclosures about cash registers and the use of sensitive franchise information, to which the franchisor has access. TIP: Look for indirect words such as “at our discretion” or “as needed” and remember you cannot count on receiving those services.

  10. Territory
    Check to see if you need a protected territory. Retail franchisees often need geographic protection.

  11. Trademarks and patents
    Lists of all trademarks, copyright registrations and patents.

  12. Obligations to participate in operation of business
    Some franchisors require franchisees to run the business themselves. Some allow hired managers to look after operations. Learn about any restrictions.

  13. Restrictions on what to sell
    Often, you can sell only what the franchisor allows.

  14. Renewal, termination, transfer, and dispute resolution
    Learn about the terms of renewal and termination, and pay attention to how disputes will be resolved. Review the FDD with your lawyer, and try to lock in as many financial considerations for renewal as possible in your first contract.

  15. Public figures
    This is relevant only if you are buying into the rare franchise systems that use public figures in their advertising.

  16. Financial performance
    In the financials, watch for corporate store earnings. They do not have to pay royalties and they have different expenses. Remember, not all franchisors report on how their current franchisees are performing financially. This should include forecast financial performance of an “average” store. Make sure you understand how your franchise will compare.

  17. Outlets and franchise information
    Shows the franchises opened, transferred and closed in the last three years. This tells you if the system is growing or shrinking. You will also be given a list of current and former franchisees. (Important!)

  18. Financial statements
    Have an accountant review the financial statements, which will show you the strength of the brand. Strong franchisors will be able to operate on royalties, not just franchise sales.

  19. Contracts and receipt
    Includes the contracts you will be required to sign and the receipt of the FDD. It is critical that you read and understand the contracts and keep copies of all documents (including the receipt).

 

See more posts in our Franchise Focus series:

Pop quiz!
Finding a match
5 tips to success
Q & A with a franchisee
Your support team
Build your empire

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