Beth Nilssen
July 26, 2013 / Great Advice

What is a Franchise Disclosure Document and Why is it Important?

Receiving and understanding the Franchise Disclosure Document (FDD) is an important step in every due diligence process when evaluating a franchisor. The FDD provides a comprehensive overview of a franchised company, including financial information, biographies of key company executives, initial investment figures and much more. The Federal Trade Commission mandates that franchisors update this information every year.

FDDs typically run a couple hundred pages long and can seem a bit daunting at first glance, but it contains vital business information that needs to be seen before you can truly evaluate a company. FDDs are split up into 23 item sections. Here’s a summary of what you will find in some of these sections and what you should look for:

Item 2: Longevity and Experience
Item 2 of the Franchise Disclosure Document contains the names, titles and professional backgrounds of our executive team as well as all people associated with directly recruiting and qualifying new franchisees. Take a look at their profiles and notice the amount of years they’ve been with the company and their past work experience. Have most of the executives been with the company a long time? Or have many of them just recently joined the company? Check to see how many of them have established backgrounds in franchising. It’s important to have a veteran and knowledgeable leadership team.

Item 3: Litigation
Item 3 of the Franchise Disclosure Document contains details on any litigation with which the company has been involved. Take special notice of how much litigation the company is involved in. If the company you are investigating is involved in a lot of litigation, what does that say about the way they support and work with franchisees? You can avoid future headaches by being wary of companies with an extensive item 3 in their FDD.

Item 5: Franchise Fees
Item 5 of the Franchise Disclosure Document contains details on franchise fees and the various stipulations involved. Compare and contrast these numbers with competing franchises. Read closely as some may seem like a good deal, when there are actually hidden stipulations down the road that can greatly affect cost.

Item 7: Estimated Initial Investment
Item 7 of the Franchise Disclosure Document outlines additional expenses that may be involved for new franchisees. Take a close look at these numbers and make sure they line up with what you have been told by representatives of the company. Also, keep these numbers in mind when you speak with current franchisees to make sure they are accurate.

Item 19: Financial Performance Representations
Item 19 of the Franchise Disclosure Document outlines what information the franchisor will provide on existing franchisee/salon performance. According to the International Franchise Association, only 30% of franchisors provide Financial Performance Representations. It’s important to note that some franchised companies only supply information from corporately-owned units in this section.

Item 20: Outlets and Franchise Information
Item 20 of the Franchise Disclosure Document outlines the number of locations opened, closed or transferred in the last three years. It’s important to ask the franchisor if transfers are going between franchisees or to external parties—if most of them are going outside the system, this could signal and issue. Great Clips has one of the most lenient policies in the business, as we give franchisees two years relocate a closed salon.

Beth Nilssen By Beth Nilssen on July 26, 2013
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