Key Points in Reviewing a Franchise Disclosure Document
There are key points in reviewing a franchise disclosure document (FDD) which is an important step for any franchisee that is contemplating a new franchise opportunity. An FDD contains information about a franchise that allows you to evaluate the business before fully committing.
When reviewing an FDD, you should seek the counsel of a franchise attorney to fully understand the legal and business implications of the offered opportunity. As general themes, you’ll want to look for the following issues when reading an FDD.
Further Assess the Benefit of the Franchise Opportunity
Each FDD contains 23 items that will more clearly present the actual benefit of the franchise opportunity. You likely have an interest in buying a franchise opportunity for several reasons. For example, you want the ability to use a name and brand that has a pre-existing goodwill and customer base. You also might expect the guidance and leadership of a franchisor to help you implement a business model that has been proven to work.
Several items in an FDD can help you determine if these franchise benefits will materialize after you sign a franchise agreement:
- Items 1 and 2 explain the franchisor’s corporate history and the experience of its management. You can perform due diligence on the business structure and management personnel to assess their value.
- Item 11 will discuss the training and help a franchisor will give you. Review the frequency, depth and overall nature of the offered assistance.
- Item 21 is an opportunity to see a franchisor’s financials. You can use this information to consider the success of a franchisor and if it will be able to support your franchise.
Look for Disclosed Risks That Could Hurt Your Franchise
As mentioned above, you probably want a franchise because of its good reputation and name recognition among customers. Lawsuits, bad press, bankruptcies and other risks can significantly reduce the value of your franchise. In the FDD, you can review litigation history and bankruptcy filings (items 3 and 4) for issues that might weaken the brand.
Additionally, you will want to review the existing franchisee and outlet information (Item 20) to look for current business relationships the franchisor has. The purpose is to avoid a situation where other franchisees might compete with your operation.
Take Note of Restrictions and Other Obligations
An FDD is a chance to learn about your obligations under the Franchise Agreement. Several items disclose the costs for the franchise and other operating requirements. Such requirements might include the use of trademarks, sourcing of products and your commitment to future agreements. The items in the FDD will also disclose your ability to sell, renew, terminate, or transfer your rights as a franchisee.
Need Help Reviewing a Franchise Disclosure Document?
An FDD is a key document to carefully review before buying a franchise opportunity. The disclosures within each item are meant to protect franchisees by arming them with the information necessary to make an informed decision.
Our attorneys rely on their experience and legal knowledge to help clients understand the contents of FDDs, so they can make the right choice about a franchise opportunity. If you need help reviewing an FDD or have other questions about a franchise agreement, please do not hesitate to contact us about a consultation.
Schedule a consultation with Franchise & Business Law Group today.