(FS6) Understanding the FDD as a Franchisee and Franchisor
While all parts of the FDD are important to not only read, but to understand, you’ll want to pay particular attention to these sections:
- Item 7: Because it talks about how much the business will cost and the initial investment, it should be 100% understood, especially that these costs are only estimates and not 100% accurate representations of what you will pay.
- Item 11: Because it lists what the franchisor’s obligations are for you.
- Item 17: Because this discusses the terms for renewal, termination, transfers, and disputes.
- Item 20: Because this provides you with specific information about the franchise, how many stores and companies are owned by this franchise, and their financial situation.
- Item 21: Because it is the franchisor’s financial statement.
- Item 22: Because it contains all agreements that you will be signing. All of them.
How Much Can a Franchisee Expect to Make?
The question on everyone franchisee’s hopeful mind: many get into business wanting to secure financial future. To find the answer to this question, a franchisee must look into the information places in item 19. Item 19 will fill in any information it can about projected sales, income, profit, and costs of franchised/non-franchised locations. Do not rely on this 100% for information though and ask your franchisor for answers direction because only about 25%-35% of franchisors provide written information in the financial performance representation review.
Also be wary of any salespersons or franchisors who say they cannot tell you about projected sales or income because of the law. The only thing they’re not allowed to discuss regarding this is the numbers they’ve chosen not to include in the FDD information all together and the law regarding the FDD requires franchisor’s to tell you what they are leaving out of their financial performance representation.
Understanding Franchising from the Franchisor’s POV
As a franchisee, you don’t have to know everything there is to know about franchising through the franchisor’s point-of-view (POV), but it is important to understand them to an extent so you can meet in the middle-grounds. A franchisor will more often than not, have been in your positions as a franchisee before, whether they headed the company with one store before franchising the idea or they bought a franchise like you’re doing before they purchased the company itself. To make your relationship easier and to understand our franchisor, keep these common franchisor thoughts and worries in mind:
- Society is litigious.
- Franchise officers or directors can be considered guilty of a crime in some states if they are found to be giving ‘improper’ earning information.
- Franchisors may feel that their systems are too diverse or complicated to give franchisees any meaningful information.
- Franchisors may feel a little iffy about providing information based on location because all of their locations are in a different stage of development.
- Some franchisor’s worry that the information their franchisee’s provide about individual unit performances are inaccurate because they have not been audited.
- Franchisors often worry that information that their franchisees provide to them are inaccurate when they are late.
- Franchisors worry non-uniform information being submitted.
- While most systems have accurate performance information on their companies, they know that not all of their stores have the same information.
- Franchisors worry that giving earning information out will give their competitors an advantage point to learn their secrets.
- There is no uniform standard for how unit financial information should be provided to prospective franchisees.
- Sometimes the numbers in the franchisor’s systems are so bad that if anyone saw them, they’d be unable to sell franchises. That’s not to say the franchises are doing bad.
It’s important to understand things from the franchisor’s point of view when reading the FDD’s while also looking out for yourself because it can add a new level of understanding and detail to the information in the FDD. Even Rupert Barkoff, a partner of the Atlanta Firm Kilpatrick Stockton LLP says, “Even when intended to be helpful [financial performance representations] can be misleading because there are so many factors that enter in the success or failure of a franchisee. For example, hard work and diligence may make one franchisee successful, but might never offset the consequences of a poor site selection.”