What to Look for in a Franchise Disclosure Document

We've talked about the franchise disclosure document in previous videos and article posts, but I want to spend some more time talking about one of the most important documents in franchising. A Franchise Disclosure Document (FDD) is a legal document that gives someone interested in buying a franchise all the important details they need to know before making a decision. Think of it as a user manual for the franchise opportunity. It explains how the franchise works, the costs involved, and what the franchisor (the company selling the franchise) expects from the franchisee (the person buying it).

Here’s what it includes:

1. Franchise Overview: A summary of the company, its history, and the franchise system.

2. Costs and Fees: The upfront costs (like the franchise fee) and ongoing expenses (such as royalties and advertising fees).

3. Training and Support: Details on the help the franchisor will provide, like training programs or ongoing support.

4. Earnings Information: If provided, an estimate of how much money you might make.

5. Legal Obligations: What the franchisee must do to stay compliant, like maintaining specific hours or buying from certain suppliers.

6. Franchisee and Franchise Relationship: Rights and responsibilities on both sides, including termination policies.

7. Financial History: Information about the franchisor's financial health.

8. Other Franchisees: A list of current and former franchisees you can contact to hear their experiences.

In short, it’s a document that ensures transparency so buyers understand exactly what they’re getting into before committing to a franchise.

Now I'd like to spend time talking about the top three most important parts of the FDD to look at right away when you're evaluating a franchise opportunity.

Understand the Investment and Financial Health

First, go straight to “Item 7”, which basically tells you what the total investment costs of the franchise is. That's going to include construction costs, the franchise fee, equipment, start up inventory, uniforms, consumables and any other working capital that you may need to start the franchise business. 

Then you're going to jump to “Item 19”, which is the financial representation of the franchise. This gives you the historical performance of the existing franchise locations. In some cases, you will be able to see the profitability of the franchise (for those Franchisors that include EBITDA in their item 19).  You're also going to want to look for trends over multiple years. This is powerful information that you need to look at to see if the brand is growing, stagnant, or declining.

Track the Brand’s Growth

In that same vein, you have Item 20, which is a list of franchise locations and the franchisees you'll be able to see year over year. You will be able to see if the brand has opened more locations, if they've stayed flat, or if they are massively declining data. It tells a powerful story, so you're going to need to look at that. You’ll also want to use that list to give a call to any of the franchisees on the list, whether they're prior franchisees that exited the system, or folks that just joined. It's really important as part of your validation process to connect with them. 

Those are the top three things that I think are the most important, but I'd love to know what you think about the top FDD sections to look at first. Drop a comment below.