The Franchise Disclosure Document Tells a Story
by Ed Teixeira
When the Franchise Disclosure Document and franchise contract is properly
reviewed it can tell a story about the franchisor. Learn which items are most
important; what to look for and why you need qualified advisors.
The FTC requires that a
Franchise Disclosure Document (“FDD”) be provided to prospective franchisees
by franchisors. There are various sections to the FDD which can range from 100
to over 200 pages. These sections include the franchise contract,
financial statements, list of current and terminated franchisees and several
There are 23 items in the FDD, which are in the form of responses required by
the FTC to be completed by the franchisor. Information in the FDD pertains to
the franchisor, franchise program, the franchise investment and the franchise
contract. Each item in the FDD is important and should be reviewed by a
competent person or professional.
However, if certain items are reviewed by the right people they will tell a
story about the franchise and it won’t be a mystery novel. You’ll find some
highlighted text, which if clicked will lead to a more detailed explanation of
Here are the Items:
- Item 2 presents the business experience for the last five
years of franchisor staff including directors and principal
officers of the franchisor and most importantly franchise
experience. Look for experience in the business sector that the
franchise operates in.
- Item 3 will disclose franchise litigation. This section can
provide insight into who filed the original complaint. A
franchise attorney can take a further look into the
complaint to obtain more facts. You can relate the number of
lawsuits to the size and age of the franchisor. Little or no
litigation can indicate good relations between the franchisor
- Item 7 presents the franchisee's estimated initial
investment needed to begin operating the franchised business,
including rent, inventory and equipment. It also
shows the estimated additional capital for a 3 month period.
The information from this section will help you construct your
break even projections. Use this information when you speak
- Item 11 will recite what the franchisor is obligated to do
for its’ franchisees. The obligations can include pre-opening
and post-opening assistance. This is where the “Rubber meets the
road” regarding how much support the franchisor will provide. Is
the franchisor providing minimal assistance to its franchisees?
Use this information to find out from current franchisees just
how helpful the franchisor is.
- Item 12 provides information regarding the territory and
whether or not that territory is exclusive. It will outline the
franchisors and the franchisee's respective rights and
restrictions in connection with doing business within the
franchisee's territory. Is
your territory really exclusive? Could there be potential
franchise encroachment issues?
- Item 17 depicts common provisions of the franchise agreement
in a table relating to the franchisor-franchisee relationship
and the specific items in the franchise contract.
- Item 19 is an optional presentation of the historic or
projected financial performance of the franchisor. If this area
is blank ask the franchisor why. This section is used by
approximately 30% of franchisors to disclose franchisee and
company unit financial data.
- Item 20 shows the number of franchised units and
company-owned units in existence for the last three years and
most importantly how many were terminated and why. You’ll be
able to identify trends regarding franchise and company unit
- Item 21 contains the franchisor's financial statements: its
balance sheet, income statement and cash flow statement. This
information should be read by your accountant or financial
advisor in order to answer a number of questions regarding the
financial health of the franchisor.
- Item 22 All of the proposed agreements relating to the sale
of a franchise. Be sure you understand and recognize what
documents you’ll be required to execute if you purchase the
Reviewing the FDD is an important part of the franchising process. However,
there are particular sections of the FDD which can reveal a good deal about the
franchisor and the franchise opportunity itself. Be sure these sections receive
the right focus and use qualified professionals to assist in the process.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC