Every formal document will always start out with a cover page. On this (these) page(s) you should look forward to this information:
There should also be a list of risks the franchisee has to acknowledge on the cover page such as:
Reminder: Just because the FDD has been filed with the state does not mean that the information has been verified. As the franchisee, you should read carefully and continue to do research to make sure the information meets where it says it does.
Now that we know what to expect on the cover page, let’s hit the rest of the document.
Item 1 contains a description of the franchise and what it offers written by the franchisor. Information required by law for item 1 includes:
Item 2 contains a biography and all personal information about the franchisor and its staff (officers, directors, executives). This is to allow franchisees a chance to learn about who they are getting into business with.
Item 3 should provide the last ten years’ worth of litigation information that has been filed with the franchisor. It should also contain specific information on any cases filed within the last year against any of its franchisees.
The purpose of item 3 is to give franchisees insight into what the franchisor-franchisee relationship looks like with this particular company. You should find cases filed by the franchisor for royalty or fee collections issues against the franchisee. You should also be able to find any case files for charges against franchisees who haven’t been following the “system standard” set by the franchisor. This will only be a one-year snapshot, but this item will give franchisees an insight into the franchisor’s practice of initiating litigations.
If your franchisor or any members of their management team have ever gone through bankruptcies and if they have, when it was. This gives franchisees a chance to find any patterns of bankruptcy among the management staff who they are preparing to have a relationship and whether that pattern is predictable or not.
Every franchisee is looking for this to make sure it fits where their budget. The FDD should disclose the complete franchise fees for the initial cost that is anything prior to opening, and exactly what they are. If they cannot give an exact cost, they should give a pretty clear range that can be expected.
There are more fees to franchising than the initial fee. Item 6 should contain a list of other fees that the franchisee can expect to be charged for in the duration of the relationship. These fees can be things like:
This is different from item 5 in that it tells you more than the initial fee. It provides the franchisee with a table that includes all expenditures on the franchisee’s part in order to establish the franchise. There will a range from the most minimal of needs to more expensive packages. This section will also list accepted methods of payment to the franchisor, a calendar of when payments are due, who to send the payment to, whether it’s refundable or nonrefundable, and if financing is available.
There are typically notes written along with each of the fees listed to help franchisees understand everything clearer. If you do not understand something, take it to someone who can explain it to you as it’s important to understand everything in the FDD 100% before making a decision.
Franchisors typically have pre-decided services and products that they are known for. Think of the brands you see in pet stores or how Dairy Queen only offers their signature food. Regardless of the industry that you enter, this section will list the suppliers that are purchased from and what supplies are available to the franchisee. You may not be required to purchase all supplies or to offer all services listed here as some franchises are bigger than others. Whatever your franchise is required to offer in the way of services or products will be listed here. If you have anything that deviates from the list, you will be required to receive permission from your franchisor before you can offer it.
Some things to know about franchisor products and services:
In item 9 will contain a reference table where franchisees will find any obligations they are required to fulfill. The list will also contain information on where else you can find information on obligations in the FDD and in the franchise agreement. The details of the obligations are usually not discussed in item 9. Note that not all franchisees in the same system or company will have the same obligations, just like they will not all have the same exact store.
However as you’re looking over the franchisee obligation section, here are some things you can expect to see:
Item ten will show any financing assistance that may be available to the franchisee through the franchisor’s system or what other franchisees have done. This item will also list all the terms and conditions for any listed financial arrangements available. The financing assistance options may be organized by purpose such as startup cost, operations, equipment, etc.
Just as was done for the franchisee, the franchisor’s list of obligations to you will also be in the FDD. Some of these obligations may be, but are not limited to, the following:
Not all franchises have strict rules about territories, but they should all have provisional information. Item 12 should usually contain the following information:
Item 13 will discuss any trademarks the franchise has through services, marks, trade names, and trademarks.
Item 14 provides franchisees with information regarding patents the company holds along with any copyrights. You’ll also learn about how they are used and how to apply for more.
These are the special terms and conditions apply to franchisees based on the individual franchise. Some will allow the owners to be absent from the location in order to run it while others will require full-time involvement at all times. That information will be under item 15.
This item talks about restrictions on the goods or services that you may offer to your consumers specifically.
This item refers to any celebrity endorsement or public figures that may recommend the product or services or stand as a symbol for the franchise. The rules listed here will be things such as pay, extent to which the public figure may perform or be involved with management and the franchise system, and the public figures total investment in the franchise.
This item will include information on levels or range of sales and sale potential, costs, income, and profit for franchise or non-franchise locations. The franchisor may also provide financial performance information relating to the subset of its units.
Item 20 will inform the franchise on locations operations that are part of the system such as:
By law, a franchisor is required to provide franchisees with the names, numbers, and addresses for the most recently franchisee or outlet who was terminated, canceled, or did not renew. The franchisor must also present the franchisee with any confidential agreements that have been signed by franchisees within the past three years.
If you’re interested in purchasing a franchise owned directly by the franchisor, you should expect to receive contact information for each of the owners over the last three years.
Item 21 should include financial statements from the last three years or shorter time gaps if the franchise has not been running for that long. There is a specific way these documents must be prepared according to the GAAP. Foreign franchisors may also submit their financial information through the Securities and Exchange Commission (SEC). If a startup franchisor doesn’t have audited financial statements available, they are able to phase their audit over the period of three years. However several states still require startup franchisor’s present financial statements with their FDD.
This item should list all the agreements and contracts that you will be required to sign as well as any ancillary agreements. Confidentiality agreements, development agreements, and software license agreements should also be listed and explained here.
You will have to sign a receipt when you receive the FDD. Inside of the FDD, you will find two copies of it in the FDD. They should state the franchisor’s name as well as contact information and any other personnel involved in the transaction. They should also state information on the salesperson who worked with you.