The Franchise Disclosure Document (
) was developed to equalize the relationship between franchiser and
franchisee. It prepares franchisees for the environment they are
entering, their obligations and duties and costs related to
marketing and management of the operation. The FDD is legally
required to be written in plain English and while it's helpful to
borrow a lawyer's eyes and intellect regarding the document, it's
imperative that the franchisee enters the business arena with a
realistic perception of expectations. No FDD is identical, but all
have some commonalities. Understanding the key facets will take
away some of the intimidation involved in confronting this often
The document provides a vision of the terrain franchisees are
about to walk through by giving information about the general
experiences of other business owners in the industry. It gives an
overview of the history of ownership that includes the likely
expenses involved before profitability is earned. It should draw a
clear picture of the income you can expect and how long it will
take for you to develop those earnings.
Every franchiser offers varying degrees of support in the form
of advertising, marketing, site selection and general support.
These are outlined together with the franchisee's obligations,
creating an honest and accurate outline of both the franchisee's
and franchiser's legal responsibilities. Pay attention to the
difference between what may be offered and what is legally defined
as an obligation.
Renewal, Termination, Transfer and Dispute Resolution
This section summarizes the relationship between franchise owner
and franchisee. It includes terms of renewal and termination along
with details about dispute resolution. Franchisees are not
automatically entitled or obligated to contract renewal. Take note
of what your obligations are when the relationship is terminated.
It's also imperative to assess the non-compete provisions limiting
the franchisee from using their gains in a competitive enterprise
after termination of an agreement.
Financial Performance Representations
Despite the importance of current franchisees' earnings to the
new business owner, little more than 40% of FDDs provide financial
performance information. When it is supplied, separate corporate
store earnings because they often carry different expenses to
franchises. When it is not provided, it's best to research earnings
and sales by speaking to existing franchise operators.
Outlets and Franchise Information
These give an overview of the total franchise's performance
through charts detailing the last three years of operation of all
current and former franchisees. Watch out for red flags such as a
high number of resold units. They may indicate poor performance in
the marketplace or poorly chosen locations. The contact details of
former franchisees are supplied, which gives you an opportunity to
assess the value of the franchise realistically through first hand
Audited statements reveal the stability of the franchiser
through profit and loss statements and balance sheets. An
accountant will be able to translate these numbers into
comprehensive information about the franchise's potential. Royalty
payments, franchise sales earnings and assets to liabilities ratios
tell you how well the franchise is sustaining itself.
Read and clarify all items in the contracts before you sign.
The FDD creates plenty of space and time for the franchiser to
gain clarity about their decision. To investigate franchise
opportunities in your area, we invite you to search through our