When you are a candidate for a franchise opportunity, one of the first things the franchisor will do is provide you with a copy of its Franchise Disclosure Document (FDD). The FDD is an extremely important document, and it provides (or should provide) a wealth of important information about several key aspects of the franchise. But, as franchise attorneys, we know that many prospective franchisees are only interested in the highlights. So, what is the most important information in an FDD?
All of the Information in the FDD is Important
We’ll start by saying that all of the information in the FDD is important. Prospective franchisees should spend at least a few hours digesting the FDD in its entirety, and they should have the FDD reviewed by a franchise attorney. Not only is the information in the FDD important in its own right, but many of the “Items” in the FDD will provide insight into other key sources of information as well.
10 Examples of Key Information in an FDD
Ok, you get it. You need to read the whole FDD. But, where should you really focus your efforts? While the most important aspects of a franchise opportunity will vary case-by-case, here are 10 examples of key information in a typical FDD:
- Litigation and Bankruptcy – Is the franchisor currently in litigation that could threaten its finances? Is it in the midst of bankruptcy proceedings (or has it filed for bankruptcy in the past)?
- Franchisor Personnel – Do the franchisor’s executives have experience managing a franchise system? Do the people who will be supporting you as a franchisee have significant experience within the franchise system?
- Initial Franchise Fee – How much is the initial franchise fee? Is this in line with industry standards, and is it comparable to the fees charged by competing brands?
- Monthly Fees – Are the royalty and marketing fund fees competitive and in line with industry standards? Are there monthly minimums, and does the franchisor have the right to draft fees directly from your account?
- Additional Fees – How much will you have to pay to renew your franchise after the initial term? How much will you have to pay if you decide to sell?
- Initial Investment – What is the franchisor’s estimated initial investment for the franchise opportunity? Is this in line with your own calculations based on your geographic area and business plan?
- Sourcing – Are you required to purchase designated products or use designated suppliers? Is the franchisor a designated supplier? What if the designated products are substandard or unnecessary?
- Territory Rights – Will you receive territory rights? Is your territory protected or exclusive? What exceptions apply (i.e. can the franchisor open company-owned stores)?
- Financial Performance and Financial Statements – Does the FDD include a financial performance representation (FPR)? Do the franchisor’s financial statements suggest that it has the financial wherewithal to continue operating long-term?
- Franchised Outlets – Is the franchise system growing? Are franchisees leaving the system (and if so, why)? Does the FDD exhibit a pattern of franchisee terminations?
Discuss Your Franchise Opportunity with an Experienced Franchise Attorney
Are you thinking about buying a franchise? If so, we encourage you to inquire about our fixed-fee franchise business reviews. To discuss your options with an experienced franchise attorney in confidence, please call 202-293-3947 or request a free consultation online today.