Are you looking at purchasing a franchise? If so, by law, you will be sent a Franchise Disclosure Document (FDD). What is an FDD? It is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process.
Complicated and lengthy, the FDD can be intimidating. It is highly recommended that you consult with appropriate professional resources, including an attorney that specializes in franchise law and a financial professional, such as an accountant, to make sure you adequately understand the information provided in the FDD prior to signing a Franchise Agreement.
Following is a breakdown of the 23 items found in an FDD:
Item 1 is an overview of the history, ownership and picture of the franchise. Item 2 details the business experience of the franchise executives. Item 3 states any litigation that may involve the franchise. Item 4 will indicate whether the franchisor and/or any officer or director is involved in bankruptcy.
Items 5, 6, and 7 discuss the initial fees, other fees and initial investment. Item 5 is an overview of the intial fees that are required to open your franchise. Item 6 is a chart of other fees, including royalty and any other fees that you might encounter during your operation. Item 7 states the fees and expenses required to open and operate your franchise for the first three months. It is important not to start your franchise undercapitalized – ask other franchisees how long it took for them to break even and have your accountant look over these items for you.
Item 8 lists any restrictions of products and services that will help the franchisee meet the standards and of the franchise. Item 9 discusses the franchisee’s obligations – it includes a list of your contractual obligations, with cross-references to the franchise agreement and the rest of the FDD. Item 10 tells you about financing options, while Item 11 outlines the content and scope of the franchisor’s support services. Item 12 shows your territory rights, while Items 13 & 14 discuss the trademark and copyright registrations, along with proprietary information.
Item 15 talks about the obligation to participate in the actual operation of the franchise business. This is to make sure that the franchisee is devoting adequate time and effort to running each location. Item 16 lets you know any restrictions on what the franchisee may sell. Item 17 provides a summary of the renewal, termination, transfer and dispute resolutions in regards to the franchise agreement. Item 18 only comes into play if a public figure is used to promote the franchise.
Item 19 is extremely important as it details the financial performance representations. Only 30-40 percent of franchisors provide information on how much their current franchisees are earning. Item 20 shows the number of franchisees opened, transferred and closed in the last three years – this lets you see if the franchise is shrinking or growing. Item 21 provides the audited financial statements that let you know if a franchisor is stable.
Items 22 and 23 include the contracts you will be required to sign and the receipt you must sign when you receive the FDD.
Franchises take different approaches regarding how much information is provided and detailed within the FDD. Great Harvest Franchising strives to provide significant detail for transparency into the franchise opportunity, and true to the Great Harvest Freedom Franchise, we try to keep it friendly and a little loose and fun to boot. We have been told candidates and even franchise attorneys that it is one of the most detailed FDDs that they have ever reviewed. One franchise attorney recently told us that reading our FDD was so warm and inviting that it made her feel like she was getting a big hug.