What Are the Most Important Items in the Franchise Disclosure Document (FDD)?

The International Franchise Association considers the six sections of the Franchise Disclosure Document to be critical pieces of information to help you evaluate a potential franchise for purchase:

 

Item 7: Costs

Some of these costs are averages or estimates and may vary in your area. Talk to other franchisees who have been in the system for a year or more to see: 

• How much money they needed in the beginning until they became profitable.  

• How much they were able to draw from the business to support themselves.  

Item 11: Franchisor's obligations. 

Be sure you understand the services you will get before you open: 

• site selection 

• training 

• development assistance

Be sure you know what services you will receive for your grand opening. 

• marketing

• advertising

• field support 

Be sure you know that services you will receive after you begin operating your business. 

• training

• advertising

• operations

Pay particular attention to those services the franchisor is obligated to provide and the services they may provide.  

Item 17: Renewal, termination, transfer and dispute resolution. 

Take your time to understand what rights you will have and what rights you are giving up. Pay particular attention to any non-compete provisions and your obligations when the franchise relationship ends.  

Item 19: Financial performance representations.  

Only 30 to 40 percent of all franchisors provide prospective franchisees with information about financial performance. The next best thing to do is to talk to existing franchisees about sales and earnings potential.  

Item 20: Outlets and franchisee information.  

Examine how many units the franchisor has taken back and resold. If this number is high, this could indicate churning (when the franchisor takes back failed locations and markets them over and over.) Pay attention to the contact information of the franchisees who have left the system,  These are people you definitely want to talk to. 

Item 21:  Financial statements.

Financial statements are the track record of the franchisor. You should be given copies of the franchisor's last three years financial statements. Take them to an accountant who specializes in franchising to evaluate. Remember that the financial condition of the franchisor not only affects its ability to run a financially successful operation in the future, but it also determines whether it may go under and you will be left "holding the bag." The two key financial statements to focus on are the balance sheet and the income statement. Make sure they are audited. 

Item 22: Contracts.

Make sure that all the agreements listed are attached to the FDD-and read every one of them.