Franchising presents entrepreneurs with a business system that has already been proven, a recognizable trademark, and ongoing support. Before, however, a person commits to a franchise agreement, some due diligence must be performed. No document is more useful to us than the Franchise Disclosure Document, which offers detailed information regarding the franchisor and the franchise system.
Understanding the FDD
This is a disclosure document that must be given to possible franchisees at least 14 days prior to agreeing or making a payment. Designed to safeguard possible buyers of franchises, the FDD is rich in facts that relate to the franchise opportunity, the franchisor’s past, and the franchise agreement.
Each franchisor must give this standardized form, which is formatted in a clear 23-point type. This makes it even more feasible for potential franchisees to compare various packages of franchising more readily and invest more intelligently based on that comparison.
Required Disclosures of the FDD
There are 23 separate items to the FDD, and several of these parts are of particular importance for attention from intending franchisees. Item 19, Financial Performance Representations, provides useful data on the earning potential of running franchise units. It is not necessary that every franchisor provide this, but where they do, this must be from actual figures of performance.
Its audited financial statements, which are given for Item 21, disclose the financial condition, inter alia, of the company. Such statements permit the intended franchisees to assess whether the franchisor can sufficiently fund the franchise system.
Items 5 and 6 disclose bankruptcy filings of the franchisor and other litigation, a summary of the company’s turbulent past and current legal status. Meanwhile, Item 20 furnishes current and former franchisees’ address, which can be used for personal contact for personal reasons.
Proper franchise agreement is provided for under Article 22, which imposes the exact terms and provision which are to govern the subject of franchise relation. It is where territorial right, renewal, termination, among other agreement provisions are discussed.
Reading the FDD Effectively
During a reading through of an FDD, begin reading the complete document carefully, more specifically the sections mentioned above. Maintain a list of all of the suspicious facts or unknown words that are responsible for clarification. Whether you find gym or retail franchises with good ROI, always assess the FDD.
Talk to current and former franchisees listed in Item 20 to learn from them first-hand of their experiences. Inquire about various matters of profitability, assistance provided from a franchisor, difficulties that they faced, and if they would re-invest.
It might even be worthwhile bringing in a franchise specialist to examine the FDD and franchise agreement. Professionals can help spot possible red flags and discuss tough contract provisions that might affect future operations of a company.
Check facts given through cross-referencing with other independent sources that are available, if possible. Also, explore the credibility of the franchisor on the internet and visit business bureaus or franchise associations for more information.
Taking Your Investment Decision
Your best tool for doing your due diligence on a franchise opportunity and safeguarding your investment is the FDD. If you review this document carefully and perform some other studies, you can come to a well-supported decision regarding whether a specific franchise complements nicely your business objectives and available financial resources.
Note carefully that the 14-day review period is intended to provide a decent period of review. Use this time so that you are better able to understand the franchise opportunity so that you are convinced that your investment can be a worthwhile one. Reading the FDD carefully now can prevent expensive mistakes and enable you to build a successful franchise company.
