THE FRANCHISE DISCLOSURE DOCUMENT (FDD)

The FDD is written by the franchisor’s attorneys and, therefore, is skewed toward the franchisor. For example, you may find ten pages on how a franchisor can terminate a franchise agreement but only a paragraph on how you can. The purpose of the FDD, in addition to educating candidates, is to protect the franchisors and existing franchisees. The FDD is written to safeguard the brand and the best interests of successful owners. When read from this perspective, it appears much more palatable.

It is akin to having a homeowner’s association. When you buy a house with an association and read the document, you learn about all the things you cannot do, such as the colors you cannot paint your house or the vehicles you cannot park in your driveway. However, when you drive through a community with a homeowner’s association and then one without the association, you see the difference. No trailers in the driveways, no peeling paint, and no overgrown grass. That  is why the franchisors write FDDs to protect the brand and ultimately, if you join, your interests.

A FEW TIPS ON READING AN FDD

First, understand that the FDD will not tell you how to be successful. I recommend reading it only after you understand all aspects of the business model, including marketing, product/service, support, and technology. Get comfortable with the franchisor. Too often candidates read the FDD early in the process, and if not ready, it is a mistake. Franchisors can get excited when they find strong candidates and send the FDD out too soon. If you are not ready for it, don’t review it. Simply tell the franchisor that you are interested in learning a bit more before focusing on the FDD.

Second, when you read the FDD, be sure to note anything you would like to discuss with the franchisor. Liberally ask questions, for clarification and more information. Asking questions, and not making assumptions, is extremely important in the due diligence process.

Third, take the perspective of a successful owner, not a candidate. This helps to reframe the FDD into a document that will protect your investment!

Fourth, I recommend you engage a franchise attorney, and I will introduce you to some of the best. Attorney review provides additional understanding of the agreement and puts you at ease. The reality is that the franchisor rarely changes the agreement, but the attorney review will deliver clarity and peace of mind.

Finally, as you begin reviewing the FDD, pay particular attention to the following key sections. These will provide an overview into the financial side and the culture of the brand.

  • Item 4: Litigation for the previous 10 years.
  • Items 5, 6, and 7: Breakdown of the costs along with a total estimate of expenses.
  • Item 19: Earnings claim.
  • Item 20: Information on franchise owners, past and present.

The Perfect Franchise

The Perfect Franchise is the one book you need to read if you are considering franchising.

Mark Schnurman is one of America’s top Franchise Consultants, and the founder of The Perfect Franchise. Mark outlines a clear process for finding the perfect franchise.

In straightforward language, he explains how to:

  • Decide whether franchising is right for you;
  • Determine which franchise will optimize your chances of success;
  • Conduct due diligence;
  • Fund your franchise investment;
  • Live the life you dream about.

If you want to be your own boss, this is the book for you!