How to Assess a Franchise Opportunity? One Step: Franchise Disclosure Documents

Homework is not only dreaded by school children, but also conjures up bad memories for those of us who have long since graduated. Unfortunately, plenty of homework (a/k/a due diligence) is required if you want to make a sound decision on a business investment.

In the world of franchising, Federal Trade Commission (FTC) regulations actually make it easier for the prospective buyer by requiring that the sellers (franchisors) compile much of the essential information needed for a proper investigation in a uniform document known as the Franchise Disclosure Document (FDD).  It must be updated at least annually, and has to be in the buyer’s possession for at least 14 calendar days before any commitment can be signed or fee paid. Every one of these documents, regardless of the issuing franchise company, will look similar because the FTC prescribes the format and requires 23 “Items” or topics to be addressed, always in the same order. This helps create a level playing field for prospective buyers who are evaluating more than one franchise concept simultaneously, making it easier to compare and contrast.

WHAT IS IN THE DISCLOSURE DOCUMENTS

Some of the details that will be in the FDD are: 

• Business experience of the franchisor and a list of affiliates and officers
• Any litigation that the franchisor has pending that may impact franchisees
• The estimated initial investment and all fees, including the initial franchise fee, ongoing royalties, advertising fees, transfer fees, etc.
• Any restrictions on the sale of products, services, and also on their sources
• Available financing and territory rights
• Renewal, termination, transfer and dispute resolution
• Information on the financial performance of franchised and/or company units (optional)
• List of outlets and franchisees, including any who left the system in the last year, and three-year grid by state of opened/closed/sold/transferred units
• Audited financial statements of the franchisor
• Sample franchise agreement

WHAT TO DO WITH THE INFORMATION

• While getting a good sense of the franchisor and its systems and track record, you’ll also be looking for red flags in the disclosure documents.  A high number of re-sales or closures or significant franchisor vs. franchisee legal disputes may be cause for concern. This does not necessarily mean that coming across an alarming sign or two means you should start looking elsewhere, but it certainly warrants further discussion on the topic with the franchisor and maybe even some franchisees.
• Once you’ve completed your due diligence and are pretty certain that you’ve found the right franchise for you, it’s a good idea to have a qualified franchise attorney review the franchise agreement section of the FDD to make sure you understand the various legal provisions.
• Contact FranNet with questions or concerns, or to learn about other franchise options that may be a better fit prior to making a final decision. By getting to know you and what your goals, ambitions and capabilities are, I can counsel you as to whether the road you are heading down truly is a road you want to travel.  I’ve personally helped many individuals, couples and families select the right business and start down a road toward success. All of my consultations, events and workshops are on a no-fee, no-obligation basis. 

We have several free events coming in the next month and a half where you can learn more about franchising. This includes two webinars and our signature event, "Meet the Franchisors," that puts you in the same room with franchisors looking to expand in Michigan. For more information, please visit frannet.com/bbetser or look at the links to the right.

You can always contact me at bbetser@frannet.com or 616-891-1374 with any questions or to learn more about franchising.

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