Why You Need to Read Your Franchise Disclosure Document

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The Franchise Disclosure Document ( FDD ) 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 lengthy document.

Market History

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.


Obligations

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 information.

Financial Statements

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.

Contracts

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 Franchise Directory.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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