(FS6) Missing Information in the FDD or Other Franchise Documents
There’s a lot of debate on what to do if an FDD doesn’t present franchisees with the financial performance representation or if they do and it’s something small. If the franchisor you’re working with doesn’t provide you with any information on it, another good source to go to is the earning potential information for the system. A third good source for information would be public companies who are shareholders in the franchise as they receive financial letters from the business to tell them how it (or their investment) is doing.
You can also dig around for more information, researching various sources, and pull together pieces from different places. Some easy access for financial research on a franchisor include:
- Item number 7 for initial investment. Pay particular attention to the notes.
- Item number 8 as it discloses any required purchases and the percentage of your operating expenses that they represent.
- Items number 5 & 6 (initial and continuing fee).
- The franchisor’s financial statement in the FDD which includes information on company-owned unit performance.
If you’re in the market for a company-owned unit, you can ask the franchisor if they have any available. If they do, you can ask to see the books and records to investigate the financial information regarding that facility. In addition to getting great information about the market for your business, you’ll also find great opportunities to buy existing locations. Note that a franchisor who has made the financial performance representation is able to give you a different, supplemental information with your FDD.
Evaluating a Franchise Agreement
You’ll find multiple documents in the FDD that will give similar, but not the same, information. Some of these documents include the franchise agreement and the earlier document that states the relationship between the franchisor and the franchisee. It’s important for the franchisee to know that the franchise agreement governs over the other document. The early document only states your relationship status.
The franchise agreement is far more specific in its terms than the FDD is. Note that more often than not, there is a clear difference between the relationship stated in the FDD and the relationship stated in the franchise agreement. Read both and understand the differences, but more importantly, understand that what’s in the franchise agreement carries more weight. If you have trouble finding the difference or understanding either document, hire a lawyer or someone trained in reading franchising documents to help you further understand them.