During today’s blog edition, FranNet brings you a frank and insightful look at five areas to focus when reviewing an FDD. That’s Franchise Disclosure Document, not Foreign Daily Digest. The FDD is probably the single most important document you’ll see during the franchise investigative process. The purpose of the FDD is to give potential buyers verified and validated information, so that one can make an informed decision on purchasing the business concept.
A couple of things you should know first and foremost. Franchises are required by FTC law to provide an FDD to any prospective franchisee. There are 23 distinct sections to go over, known as “Items”. But here are five areas to focus your attention the most:
Item 1:
In this section, you’ll find the complete history of the franchised offering. You may discover that the brand has been in business for years, but only recently entered into franchising their concept. Item 1 also takes into account the true and accurate ownership of the franchise brand. Any parent companies, trusts, partners, investors or the like must be revealed.
Item 7:
Although individual fees and costs are disclosed in earlier Items, this section collates all of the financial information in one place, providing you—the interested buyer—with exactly what is required of you to invest in the franchise concept. It’s meant to cover all associated costs with opening a business under their brand name. In other words, a comprehensive look at the total investment required.
Item 9:
If you want to know exactly how the roles of franchisor and franchisee go together, this is the section that spells out everyone’s obligations to one another. This can vary quite a bit depending on the brand, so be sure to ask questions if you’re unsure of a certain responsibility in the operational process.
Item 12:
If you want to know what kind of exclusivity you’ll have in operating a franchise in your particular area, pay close attention to Item 12. It’s designed to provide you with exact specifications for territories, areas and operational coverage. There’s a big difference from a having another similar franchise operation five miles away versus a few blocks.
Item 19:
Time to perk up your senses–this is a section where you really need to pay attention. Item 19 deals with a franchisor’s financial performance and standing, as a business. It should be noted that Item 19 is not necessarily required, but if it isn’t part of the full FDD, then the franchisor is prohibited from providing separate earnings information or claims. Item 19 can vary quite a bit and it’s best to review this section with professional legal or accounting personnel. Preferably both.
When you decide to begin your own franchise investigation, you will come across the FDD for review. We always preach due-diligence, and this is a step which requires great care and concern. If you would like to review a sample FDD for practice, FranNet is always willing to help. Simply arrange a no-cost, no-obligation meeting with one of our qualified representatives and we’ll help you manage expectations.
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