Why the Franchise Disclosure Document (FDD) is So Important
At MFV Expositions, we’re dedicated to providing valuable insights for entrepreneurs interested in pursuing franchise ownership. Based on in-depth knowledge and industry experience, we’d like to share our perspective on one of the most important steps of investigating franchises – reviewing the franchise disclosure document (FDD). For those who are unfamiliar with the FDD, it’s a 23-part legal document mandated by the FTC. Each of the sections provide potential owners with all the information (and disclosures) they need to make an informed decision about purchasing a franchise.
But why is the FDD so important for prospective candidates? Because it holds the franchisor to account in providing accurate information about their brand, their history, their financial performance, and much more. The FDD protects the consumer from buying a franchised business that makes unverified or unscrupulous claims. Keep reading for an explanation of what’s included in the typical FDD, and why it’s important to understand its contents before you decide to buy into a particular franchise opportunity.
Rules & Regulations
First and foremost, a quick review of FTC-mandated rules and regulations for franchise candidates who review a brand’s FDD. Some franchisors may require you to sign a non-disclosure agreement (NDA) to receive the FDD, which is perfectly normal. Reviewing the FDD is bound by two important dates. First, once you receive the FDD, there’s a 14-day waiting period before you can make a decision to purchase the business by signing a franchise agreement. On top of that, there’s an additional seven-day waiting period in which the franchisor must provide candidates with a complete franchise agreement to address any changes, clauses, or stipulations worked out during negotiations.
A Breakdown of FDD Sections
FDDs are broken down into 23 different “Items,” each with something of value to learn about the franchisor, their operations, and their business model. Here’s a handy guide that splits these items into five distinct sections:
Items 1-4: The “Who”
The first four sections provide candidates with who the franchisor is, if they’re owned by a parent company, who else has a controlling stake in the brand, its predecessors, and its affiliates.
Items 5-9: The “How Much?”
These sections require franchisors to disclose an accurate snapshot of the fees involved, not just in starting the business, but also running it. Also included are any disclosed costs for advertising, technology, and the total investment range required of candidates to buy into the system.
Items 10-18: “The What?”
Everything included in these sections will explain what you, the franchise owner, will receive in exchange for buying into the system.
Items 19-21: “How it Works”
Here, you’ll find everything you need to know about the franchisors’ financial performance and an idea of what you can expect to earn as an owner in their system.
Items 22-23: “Legalese”
These final two sections disclose everything involved in the contract, or franchise agreement.
Where to Focus Your Attention
For prospective franchise owners, some sections of the FDD carry much more importance than others. These crucial sections begin with Item 1, because you need to know who you’ll be doing business with. Items 5-6 are critical because they outline all fees and costs. Item 9 details the franchisee’s legal obligations and Item 12 outlines the specific parameters of the franchisor’s territories. Item 14 focuses on trademarks and Item 16 spells out specifically what franchisees are allowed to offer and sell. But perhaps the most important section of all is Item 19, as it discloses the franchisor’s true sales and verifies the brand’s financial performance. Franchisors are prohibited from making any exaggerated financial claims not specifically categorized in Item 19 of their FDD.
Some Final Advice
We saved this last piece of advice for the end – just to stress its importance. You should know that FDDs are long and complicated legal documents that can include hundreds of pages of intimidating language. That being said, it’s highly advisable – highly advisable – for candidates to review a franchisors’ FDD with the assistance of a qualified franchise attorney and/or professional accountant. Investigating a franchise opportunity is a time for meticulous and careful research, often referred to as “doing your due diligence.” It’s very important to take this advice seriously, as becoming your own boss is, in fact, a monumental decision with far-reaching implications for the future of you and your loved ones. Above all, be patient and allow yourself the requisite amount of time to make the right informed decision about business ownership of your own. The FDD is simply a roadmap for determining if the opportunity is right for you.
Empowered with a deeper understanding of the Franchise Disclosure Document (FDD), aspiring entrepreneurs are better equipped to navigate the landscape of franchise ownership. At MFV Expositions, we recognize the pivotal role of the FDD in the franchising journey. Our franchise expos serve as invaluable platforms where prospective franchisees can engage directly with franchisors, delve deeper into FDD specifics, and gain firsthand insights into various franchise opportunities. Explore our website for upcoming expos, workshops, and resources designed to empower your pursuit of franchise ownership.