Sitting down to read the Franchise Disclosure Document, or FDD, might not be the most fun reading experience you’ll ever have in your life, but it does provide most of the information that you'll need to select the right franchise for you. These documents present all the facts you’ll need on a given franchise, making the process of investing in the right business that much easier.
The FDD has 23 items, as well as exhibits that provide a ton of supplemental information attached as exhibits. This is your guide to understanding the information containes in the FDD.
ITEMS 1-4: HISTORY
Item 1: This is a general review of the franchise and includes any predecessors or affiliates and the opportunity being offered. This essential overview of the business is one of the first sections you'll want to look at.
Item 2: Here you’ll find background info on the people that have management responsibility related to the sale or operation of the franchise. You’ll be able to explore their CV over the last five years and as well as other business experience they’ve had running other companies.
Items 3 and 4: Both of these items detail litigation or bankruptcy action, past or present, on the part of the franchise or its employees.
ITEMS 5-7: FEES AND COSTS
Item 5: Any and all up-front fees you have to pay when you open the franchise business.
Item 6: Any and all other fees that may be asked of you in the subsequent operation of the franchise. This will include royalties, advertising, renewal, transfer fees etc.
Item 7: A breakdown of every component of the initial investment you'll be asked to make while running the franchise, plus an allowance of initial advertising and operating capital reserves. This section is essential, but the information’s worth is hindered by the reality that the franchise is required to volunteer the information in a table involving ranges of potential costs. This section will help assess the most accurate estimate possible for your location and financial capabilities.
ITEMS 9, 11 AND 15: CONTRACTUAL OBLIGATIONS OF FRANCHISEE AND FRANCHISOR
Item 9: Your franchisee requirements are listed here in a table. The table has listed major areas of responsibility in the business (ie obligations pertaining to discovering the real estate site for your business), then offers detailed references to specific areas of the FDD and the franchise agreement contract that define the legal obligations you're assuming. While it might seem tedious to finish all the cross-referencing that is required by this format, it is essential for you.
Item 11: An outline of the franchisors contractual support obligations. This tends to be the longest FDD section. It matters because it informs you what you get for your franchise fees. You’ll learn about assistance before opening as well as continued assistance. You’ll also learn about the franchisor's training programs and required franchise systems, like computer point of sale.
Item 15: This is an explanation of your specific personal obligations in relation to the operation of the franchise business.
ITEM 12: TERRITORY
This is a breakdown on the parameters of territory. This varies from franchise to franchise. It may seem counter-intuitive but the most successful franchises tend to have very limited territories.
ITEM 17: EXIT STRATEGIES AND DISPUTE RESOLUTION PROCEDURES
Item 17: Here you discover the restrictions related to the renewing, ending or transferring of your Franchise Agreement. You might also find specifications on any required methodology for dispute resolution.
ITEM 19: FINANCIAL PERFORMANCE INFORMATION
Item 19: This explains the franchisors representations about the financial performance of their units. This will provide a good first step on learning how much money people you can make.
ITEM 20: EXISTING UNIT DATA
Item 20: Information here listed in tabular form about the size of the franchise system. This information will help you see how many of a franchise’s units have had their ownership transferred or shut. This is a good barometer for judging the success of a franchise.
ITEMS 21 AND 22: FINANCIAL STATEMENTS AND CONTRACTS
Item 21: This discloses the franchises audited financial statements for the last three years. This is a key area for finding out the franchise’s financial strength and stability.
Item 22: This explains the contracts you may be forced to execute in conjunction with becoming a franchisee, like the actual Franchise Agreement contract and other contracts covering personal guarantees, real estate assignments, advertising, etc.
OTHER RULES, RESTRICTIONS AND INFORMATION
Items 8, 10, 13 14, 16, 18 and 21 There are all important sections for getting information about the franchise, such as where to buy supplies, what products and services you can sell and what your personal participation obligations are.