WHAT QUESTIONS SHOULD I ASK ABOUT THE FDD?
The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. As part of your due diligence, it’s a good idea to ask your franchisor questions about a variety of topics – they should be able to answer many of your questions by referencing information contained in their FDD.
Following are questions you may want to ask your franchisor, along with the section of the FDD where the answers may typically be found. It’s also a good idea to review the FDD with a business advisor and attorney, who may assist you with additional questions to ask the prospective franchisor.
What is the franchise? Usually this is contained in Item 1
How much does it cost? Items 5,6,7 and parts of 8 and 11 cover the initial investment, including what amounts are paid to the franchisor and its affiliates and which amounts are paid to third parties.
Is franchisor funding available? Item 10 contains financing information, if applicable.
How much will I make? Item 19 contains financial performance representations that may include revenue, percentage year over year growth history, net income and other metrics.
How does the franchise system operate? Item 8 contains restrictions on sourcing products, information about supply chain management services and revenue received by the franchisor for such services. Item 16 contains restrictions on what you may sell as a franchisee. Item 11 covers advertising and training. Item 12 covers the territory in which the franchise may operate and/or market.
If I become a franchisee, what are your (the franchisor) obligations to me? Item 11 covers financial and other types of assistance offered to franchisees.
If I become a franchisee, what are my obligations to the you (the franchisor)? Item 9 covers franchisee obligations.
What intellectual property is being licensed and for how long? Item 13 contains information about trademarks. Item 14 contains information about patents and copyrights.
What are your (the franchisor) technology requirements? Item 11 contains information about computer systems and technology licenses.
Who are your franchisees? Item 20 contains names and contact information for current and past franchisees
What happens if I want to leave the franchise system? Item 17 contains information about franchise agreement renewal, transfer, termination and default remedy provisions.