FDDs – Why are They so Important?

Perhaps the single-most important asset in the franchise buying process is the Franchise Disclosure Document, or FDD. The key word here is disclosure, as you’ll be reviewing a document that’s authored according to FTC guidelines. The purpose of the FDD is to share any and all pertinent information about a franchise opportunity, including the brand’s value proposition, processes, systems, and operations. This information is divided into 23 separate sections called “Items.” Each of the Items addresses a specific area, where franchisors clearly define their role – as well as the role of their franchisees – in great detail.

FDDs include information about the franchisor’s background, history, established units to date, and an accounting of every type of fee encountered. You’ll learn about the required investment, territorial claims, patents or trademarks, restrictions, length of term, and – perhaps most importantly – the financial performance of the brand. Within the FDD, franchisors even have to divulge any bankruptcy or pending litigation against the brand. 

For potential franchisee candidates, Franchise Disclosure Documents must be shared a full 14 business days prior to signing any official paperwork regarding a purchase. Of the 23 Items included, here’s a rundown of the sections where you should pay extra close attention:

Item 1

This section gives you the who, what, where, when, and why of a franchise brand. The franchisor must disclose any ownership or affiliated companies, while providing candidates with their corporate history.

Items 5-6

These sections will provide a simple, direct, and easy to understand look at all fees required of franchisees. From the purchase price to the recurring royalty rate – and everything in between. Based on your own financial tolerance, you should get a pretty good idea of what you can afford. And what you can’t.

Item 12

This is the section that includes the definition of your territorial rights as a franchisee in the franchisor’s system. Pay close attention to how your territory is defined, as brands sometimes use varying distances and demographic information to define the precise area you can lawfully operate as a franchisee.

Item 14

This section provides candidates with any and all legal usages for the brand. It includes a franchisor’s patents – or pending ones – as well as copyrights, trademarks, and licensing. If it’s proprietary information to the brand, you’ll read about it here.

Item 17

Another very important section is Item 17. It spells out the franchisor’s process for renewing your franchise agreement, terminating it, or transferring it. Though hopefully you won’t need it, you’ll also learn what you can expect in terms of dispute resolution.

Item 19

Most franchisee candidates have the highest degree of interest in the Item 19 section, as it deals with the brand’s financial performance. These include both statements and claims that reveal the brand’s potential as a business opportunity. Franchisors must disclose an accurate accounting of existing units, as well as those under development. You’ll learn how many units are corporate-owned and how many are operated by franchisees in the system. The brand will also disclose benchmarks for financial performance. Outside of the stated claims in Item 19, franchisors are prohibited from making any claims related to their brand’s financial performance.

As you can see, the Franchise Disclosure Document is the centerpiece of your negotiation to own a franchise. As such, it’s highly advisable for candidates to seek the counsel of a licensed franchise attorney and/or your personal CPA or accountant. Together, these professionals can give you an honest assessment of your ability to purchase, own, and operate one of the brand’s establishments. Then – and only then – can you make an informed decision about continuing on in the purchase process.

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