So, you’re thinking of buying a franchise? It’s a huge step, possibly one of the biggest financial decisions you will ever make. Many questions are likely running through your head as you contemplate this big move.

Before you sign on the dotted line, you get something very helpful. The franchisor *must* give you a franchise disclosure document, often referred to as an FDD. I want to really focus in on what the importance is behind having a franchise disclosure document.

Table of Contents:

Understanding the Franchise Disclosure Document

The Federal Trade Commission (FTC) requires franchisors to provide this document to prospective buyers. The franchise disclosure document is there to protect *you* as a potential franchisee. This important document is intended to give prospective franchisees the material information they need, helping prevent unfair business practices.

Think of it as a comprehensive guide detailing the franchise. It allows you to review and assess the risks and benefits. You should receive it at least 14 days *before* signing anything or paying any money, as part of your consumer protection.

Franchisor’s Background and Experience

This document is divided into distinct sections, breaking everything down more simply. For the very first section, item 1 gives you the background on the franchisor and its affiliates. Pay attention to how long the franchise business has been in operation.

Item 2 expands by sharing their experiences. Check to see if any special licenses or permits might be required to operate the franchised business.

Legal and Financial Matters

Is there any litigation history? Item 3 will tell you, letting you learn about the past and present business dealings. Previous conviction of its executives or litigation are disclosed within it.

Item 4 is the bankruptcy check, plain and simple. Items 5 through 7 are what you’re likely looking forward to digging through, because this covers your payments. This section includes advertising fees and other payments, clarifying your initial investment.

Review all the costs upfront. Sometimes, starting a franchise means being comfortable investing money with the intent of being in it for the long haul. This helps to determine if it is a viable business opportunity.

Operational Constraints

Franchisors sometimes impose restrictions, which you can discover in item 8 and item 12 of the franchise disclosure document. In Item 8 and item 12, franchisors detail supply purchases.

Franchisors control aspects like territory, product offerings, sourcing, and selling. For instance, do they require certain purchases, potentially limiting your choice of menu items?

These sections address those questions and much more, including whether they dictate your selling methods or suppliers. These are critical things that every potential franchisee should research.

Marketing and Training Insights

Training and advertising get a share too in item 11. Some fees paid to franchisors might surprise you.

Read their qualifications before investing money into training. Review trainers’ experience before paying to use this for your training costs.

Are there specific qualifications for trainers? Who pays for training newcomers?

Franchise Disclosure Document: Agreements, Renewals, and Disputes

Item 17 seems almost meant to be in the latter half of this critical document. While starting is exciting, it gives you critical items to remember that you have to do your due diligence when preparing. It covers details like dispute resolution.

Here’s what it includes: contract terms about ending early or handling disagreements. Understand your requirements for qualifying, and all terms around it, like the cost of fees, before seeking franchise opportunities. The franchise agreement will address this.

Key Items in the Franchise Disclosure Document
Item Number Description Key Questions to Ask
1 Franchisor’s Background How long has the franchise been in business? Are there any unique legal requirements?
2 Business Experience What’s the background of key executives? How long have they been with the company?
3 Litigation Has the franchisor or executives faced franchise-related legal actions?
4 Bankruptcy Any bankruptcies for the franchisor, affiliates, or key executives?
5-7 Costs and Fees What are ALL costs upfront? How long will it take to get revenue, including any and all initial investment needs?
8 & 12 Restrictions What limits does a franchisor place on purchasing or locations to set up a new business? Are there rules related to sourcing or competition matters?
11 Advertising/Training What say is given over ad budgets to you, as the buyer? Are there additional costs outside initial training to learn about new processes and people? Are public figures involved in promoting the franchise?
17 Renewal, Termination, Transfer Can the contract change? Are there restrictions to opening future competing franchises? What are the details regarding dispute resolution?
19 Financial Performance What are sales earning details shared? Only item 19 are allowed or it is illegitimate, are there additional verifiable exceptions? Do these financial performance representations align with reality?
20 Franchisee Information How many past and current franchises are there? How many closed ones in my area, with contact details given?
21 Financial Statements Are there statements I can review that are recent? How stable are things with earnings based on revenue?
22 Contracts Can all documentation be given to understand fully agreements for leases, purchases, finance or the agreement? Is there information available through the FTC’s business blog or any recent press release materials?

Earnings Claims and Franchisee Data

Item 19 gives insights into their claimed revenue they have received from previous franchises. But this might make you ask, where else could financial claims be placed?

They *can’t*. It’s *only* valid in this section, according to FTC franchise laws, known as the franchise rule.

Reach out and contact their team or owners. Check if numbers line up correctly with their stories and the information given.

Analyzing Financial Health in the Franchise Disclosure Document

Get your financial information ready. Item 20 has names of franchise contacts that can become extremely valuable.

These people already walked a similar path to you. Talk to current *and* former franchisees.

Current members may know recent details or challenges with openings. Ask the former owner what happened with their businesses, to best prepare to prevent anticompetitive practices.

Reviewing Agreements

Item 21 provides financial statements on a new franchise location and those of the past. It contains information about the current business’ finances.

Consult an accountant, if finances are not your thing. What does revenue depend on — franchisee fees?

It covers up to the last 3 years, to have plenty of time covered. Finally, you have Item 22 to get things documented. All proposed franchise papers can be accessed within this specific Item, including things like funding contracts. Review it very carefully with your team, including checking legal resources, and utilize the FTC’s legal library.

Conclusion

Ultimately, you need a professional with solid, real-world expertise to examine this very important business documentation for legal compliance. The FTC provides numerous resources to assist, including consumer protection guidance documents and business guidance documents.

But more critically, you will need support with all the required details of understanding everything given inside your franchise disclosure document. Browsing legal resources, along with speaking to legal experts, are key.

Reviewing your franchise disclosure document before making a business decision is extremely critical, it’s essentially the law. Reviewing the document protects you from uncertainties or legal problems that could come up down the road.