If you’ve ever read a stock or mutual fund prospectus before investing, you have a good idea of what a Franchise Disclosure Document (FDD) is.

The Federal Trade Commission (FTC) requires every franchisor selling a franchise in the United States to publish and provide an FDD to potential investors during the presale discovery process.

Much like a prospectus, an FDD discloses extensive information that allows you to weigh your risks and benefits before investing.

In fact, the FTC prescribes 23 chapters or “items” of information that must be disclosed to you – in a specific order. This allows you to compare franchise opportunities apples-to-apples. (For a list of the 23 items, plus tips on how to interpret them, check out this blog).

Typically north of 300 pages, an FDD informs and educates – but it also defines roles and expectations (yours and the franchisor’s) so you won’t be blindsided.

What You Will Find In An FDD

Buying a business is a huge financial and lifestyle commitment. In fact, most franchise agreements run for 10 years and are renewable thereafter. So, from legal and practical perspectives it is imperative to carefully and thoroughly review the FDD before finalizing your investment decision.

The FDD allows the brand to tell its story in ways that help you make an informed decision. Among key items included are:

  • Overview of the company’s history, business model and competitive landscape
  • Background and experience of the company’s senior executives
  • Details of prior litigation and bankruptcies (if any)
  • The size and scope of the geographic territory in which you’d run your business
  • The franchise’s three-year growth trend, including any closed and failed locations

Financially, you’ll have access to figures such as:

  • Your estimated investment
  • One-time and ongoing fees – like royalties
  • The franchisor’s audited financial statements for the past three years (invaluable insight into the company’s financial health)

Financial Performance Data In An FDD Is Optional

Franchisors have the option to publish financial performance data for locations they own as well as those operated by franchisees. About two-thirds of franchisors do, though the scope and transparency of the data published varies greatly.

Some franchisors present detailed income statements covering topline revenue, all fees, key expenses and operating profit margin. Most offer only snippets of this information, however.

Regardless, be aware that when you ask a franchisor “How much can I make?”- the only financial information they can legally discuss is whatever is disclosed in their “Item 19” – which is the chapter where this optional information is contained. Be leery if a representative offers “off the record” data – ethically and legally, that’s a line crossed.

Using An FDD To Contact Franchisees

Though every section of an FDD is a huge boost to your due diligence, perhaps none is more helpful than the rosters of the system’s current and former franchisees. Included as exhibits, the rosters include names, addresses and phone numbers. This allows you to reach out and ask anyone almost anything.

“What’s life like as an owner?” “How well are you trained and supported?” “How much do you earn?” “Would you invest again?” “Why did you leave the system?”

It’s actually not THAT simple. Not every franchisee is willing to talk. And even those who do may be guarded in their responses. There’s a skill and process to approaching this correctly – but done right, the insight and data you can gain is immensely helpful.

When franchisors provide you with their FDD, they will explain the best ways for you to speak with their franchisees. If you work with a consultant, you’ll be coached on what to ask, how to ask and when to ask so that you can optimize the experience for yourself and those you’ll be speaking with.

An FDD Seems One-sided, But Protects You

When reading an FDD, it immediately becomes clear that the document is written by the franchisor’s attorney. The terms of the agreement are definitive and in favor of the franchisor. The rules for what you as a franchisee can and cannot do are etched in stone – no exceptions.

But this is actually good for you. Think about it – what makes a franchise successful is its ability to replicate the same processes, policies and customer experiences across the entire system. This is possible only if everyone follows the rules.

So, just like the rules of a homeowner’s association protect property values by holding all neighbors to the same standards, an FDD protects your investment by holding all franchisees accountable to the same rules. No freelancing. Rogue performers can be dealt with before their actions tarnish your system’s brand and value.

These five tips will help you make the best use of your FDD review:

1. Enlist Legal & Accounting Professionals

Just before you’re ready to sign, you will definitely want to hire an attorney who specializes in franchise law to review your FDD and Franchise Agreement and call out any odd, vague and inconsistent clauses.

And though most of these documents are non-negotiable, an experienced franchise attorney knows where there may be wiggle room. By the way, working with a franchise attorney – not just any lawyer – is a must. This blog explains why.

Enlisting a Certified Public Accountant to scan the financial portions and help with tax planning is also wise. We can refer you to legal and accounting experts we partner with.

2. Know Your Timeline

Per the Federal Trade Commission, a franchisor must provide its FDD – usually digitally, via an email link – at least 14 days before you sign a binding franchise agreement and execute a financial transaction. This period may vary slightly across a few states, but the point is clear: You must be given ample time to review and understand what you are signing!

3. Know Your State

Franchisors are required to update their FDD annually or whenever there is a material change. In most cases, the franchisor simply files the updated FDD with a state’s regulatory oversight agency and life goes on.

In 13 states, however, the franchisor must re-register and pause sales activities – or “go dark” – until the new FDD is reviewed and approved. They may happen in the March to May period; on some occasions it may extend longer.

The so-called registration states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington and Wisconsin.

Just be aware that if you live or plan to establish your business in one of these states, there may be a delay until the updated FDD is approved and a copy is provided to you. The new agreement’s terms will apply to you.

4. Submit Your Receipt

The FTC stipulates that you must sign a “receipt” acknowledging the franchisor has provided you an FDD. Signing, dating and returning this page (“Item 23”) is proof that the franchisor has complied with the 14-day review period. Signing a receipt does NOT obligate you to proceed with a purchase.

5. What About Canada?

Because of their shared border, it is not uncommon for citizens of either country to invest in the other. In Canada, franchise oversight is exercised at the provincial level. Six of the 10 provinces — Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island — require franchise disclosure. Get more information from the Canadian Franchise Association.

Get Smarter With These FDD Resources

If you’re going through a discovery process alone and get stuck, we’re happy to walk you through an FDD Primer and answer basic questions. The process can be complex; an experienced navigator can save you time, worry and frustration. Contact us.

Want Help Evaluating Franchise Opportunities?

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