Understanding the Franchise Disclosure Document (FDD)

Описание: So you are researching buying a franchise. By law the franchisor must send you their FDD (Franchise Disclosure Documents) before you can invest. The FDD has a huge amount of information that will help you make an informed decision.

There is a disclosure waiting period between when you sign for the FDD and when you can actually buy the franchise which is a federally mandated 14 days. So even if you wanted to you can't invest for 14 days after receiving and signing for the Franchise Disclosure Documents. There is also a 7 day period for the franchise agreements - so most franchises will send both at the same time and have the waiting periods run concurrently.


When the franchisor finally agrees to send you the documents You think "Great, I will get everything I need to know in this document" but you receive it and it is a daunting 400 pages long!! You may consider the document is too complex and you put it away maybe to look at it "tomorrow, or worse, to just rely on what you have been told by the franchisor.

Well reading an FDD is actually not that hard, and there is some fantastic information that will really help you learn a lot. Now please make note I always recommend you run the FDD and the agreement by a competent FRANCHISE lawyer. and why I stress franchise lawyer is that a non specialist lawyer who doesn't have experience in these agreements will often consider it to be overly restrictive. They often don't understand the very nature of a franchise is highly regulated right down to how many pickles your employees put on the Big Mac. That's just the nature of franchising

What we are suggesting is once you understand how to read the FDD, you can then determine whether it is even worth your time and money to pay a lawyer to look at it. If the Disclosure Document is not to your liking and you choose not to proceed with the franchise you can save money on a lawyer.

I won't go into any great detail today this will be a crash course on how to quickly hone in on the important parts of an FDD.

The first page will be a general overview of the franchise and investment amounts. Most of this you will already know if you have been working with the franchisor.

The Table of Contents page outlines the 23 items of the FDD. This is a standardized format and every FDD will have exactly the same table of contents and 23 items. Let's go over them one by one.

Item 1. The Franchisor and Any Parents, Predecessors, and Affiliates. This will be a few paragraphs regarding the business, date of incorporation, is it owned or controlled by other entities? Where is it's principle place of business, formal operating name and other details. They will also list details about the franchise, applicable regulations and potential competition. This is great data as it will provide insight into who your competition might be. Don't let the legal type wording scare you off.... the FDD is created in such a way it can be jarring after hearing all the smooth sales talk. The reality is typically somewhere between the sales person and the FDD. So item one - we have learned about the franchise history and some details of the compettion.

Item 2. Business Experience. This will outline all of the people involved in the franchise. very helpful and a small tip - Google the names of the people in the FDD. See what comes up. Did they come from other failed franchises? Have they been involved in lawsuits. Check out their Linkedin profiles. management of a franchise system is very important so you should feel confident in the franchise itself as well as the people running it.

Item 3. Litigation. Has the franchise sued anyone or have they been sued? Its not the end of the world if you see lawsuits. Franchising is a very litigious industry. But - if you see several instances of franchisees suing for reasons of fraud, misrepresentation, or breech of contract you may want to look elsewhere, or at minimum up your due diligence.....

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