The Franchise Disclosure Document (FDD) is a legal document that franchisors are legally-required to provide to new franchisees at least 14 calendar days (or longer in some states) before they sign a franchise agreement. While scouring the pages of an FDD can seem like a daunting task, state and federal laws require franchisors to provide prospective franchisees with these documents for a reason, and anyone considering a potential franchise opportunity should be sure to carefully review all 23 “Items” of the franchisor’s FDD.
Still not sure that you want to try to conquer the FDD? Here are 10 reasons why it will be worth your time:
10 Reasons to Read Your Franchisor’s FDD
1. You Can Learn about the Franchisor’s History and Key Personnel
How long has the franchisor been franchising? What experience do its executives and key personnel have both (i) in the business being franchised, and (ii) in the franchise industry? You can find these answers in Items 1 and 2 of the FDD.
2. You Can Find Out if the Franchisor Has Been Sued
Is the franchisor in litigation with any of its franchisees? Is it facing a lawsuit that could lead to insolvency? Items 3 and 4 of the FDD include important information about litigation and the franchisor’s bankruptcy history (if any).
3. You Can Find Out How Much You Have to Pay
Items 5 and 6 of the FDD disclose the fees you will need to pay to the franchisor (including the initial franchise fee, royalties and marketing fees), and Item 7 provides an estimate of your total initial investment. In Item 8, you can learn whether you will be required to purchase mandatory products or use mandatory suppliers. If the franchisor offers financing, you can find the terms in Item 10.
4. You Can Use it to Find Key Provisions in Your Franchise Agreement
Are you curious about your transfer or renewal rights? What about “cause” for termination of your franchise? You can find cross-references and summaries for key provisions of the franchise agreement in Items 9 and 17. You can also find a list of any other contracts you will be required to sign in Item 22.
5. You Can Learn about the Franchisor’s (Limited) Obligations
What can you expect with regard to initial training and ongoing assistance? Check Item 11. Can the franchisor sell other franchises in your “territory”? Check Item 12.
6. You Can Learn about the Value of the Franchisor’s Brand
A strong brand is one of the hallmarks of a valuable franchise opportunity. You can find out if the franchisor has registered its trademarks and if it is facing any potential challenges to its intellectual property rights in Items 13 and 14.
7. You Can Learn More about Your Expectations as a Franchisee
Are you prepared to provide “on-premises” supervision if it is required? Are you ok with the franchisor limiting the products or services you sell? You can find out if these restrictions apply in Items 15 and 16.
8. You Can (Potentially) Learn How Much the Franchisor Thinks You’ll Be Able to Make
Item 19 of the FDD is labeled “Financial Performance Representations,” and franchisors have the option to provide either (i) information about actual franchisees’ performance or performance projections, or (ii) a “negative disclosure” stating that it does not disclose information about franchisee performance.
9. You Can Find Out if the Franchise System is Growing
How many franchises have opened in recent years? How many have closed? How many franchisees have chosen not to renew? You can find lots of data about the franchise system’s growth and recent changes in Item 20 of the FDD.
10. You Can Review the Franchisor’s Financial Statements
Franchisors must provide their financial statements in Item 21. An accountant experienced in reviewing franchisor financials will be able to help you understand the franchisor’s financial condition and whether there are any concerns that merit consideration.
One Critical Reason to Keep Your Copy of the FDD
Finally, if you decide to buy the franchise, you should be sure to keep your copy of the FDD. Franchise laws in many states provide remedies for franchisees who fall victim to franchisors’ disclosure violations, and having a copy of your FDD on-hand will give you the information you need to make informed decisions about asserting your legal rights.
Contact the Goldstein Law Firm
The Goldstein Law Firm provides experienced legal representation for individuals and groups considering new franchise investments. For a free initial consultation, please call (202) 293-3947 or get in touch online today.