Today, we are going to discuss a topic that will come up once our clients start vetting franchises. That topic is the Franchise Disclosure Document, or FDD. As we begin the mutual vetting journey with franchisors that we call the Discovery Process, the FDD can be an easy place to get caught in the weeds.
In this article, we will aim to minimize some of the anxiety that can surround the Franchise Disclosure Document. Especially for people going through the process of becoming a franchise owner for the first time – like most of our clients – the FDD can feel daunting. But we will be right by your side every step of the way to make sure you fully understand it.
So What Is This Sucker?
An FDD is a legal document that is typically a couple of hundred pages long. It will cover a whole slew of things that we will get into in a second. The Federal Trade Commission (FTC) requires that all franchisors provide prospective buyers with an FDD. These documents have to be updated every single year and have to be renewed and registered in every single state.
That said, every FDD operates with essentially the same template. From the perspective of a potential franchisee like yourself, that is a definite advantage because it makes FDDs easier to compare with each other. In other words, if you are looking at FDDs from three different franchises, they are all going to look pretty similar.
What Will the Franchise Disclosure Document Cover?
At the beginning of the document, there are actually 23 sections that you will see referred to as “Items.” These Items might cover topics like…
The history of the franchise
The contractual obligations of both the franchisee and the franchisor
How the franchisor separates territories
Any other basic rules and restrictions
The financial statements of the franchisor
Contact information for all the franchise’s existing owners.
You will often find that the FDDs are heavy on language related to brand protection. In other words, you will be able to find out what they are doing to protect the brand.
You may own that franchise at some point, so you want this language to be very strong, very definite, and very black-and-white. As a franchise owner, you don’t want somebody coming into the same brand and messing it up or diluting the branding.
The brand protection language in the FDD sometimes comes off a little harsh – but before you get intimidated, take a breath. Here is the advice we give our clients: If you come across language that sounds harsh, read it as if you are already an owner of that franchise and see if it still sounds that way. Essentially, the FDD is saying, “If you are going to come in and screw things up, the franchisor is going to step in.”
So if your plan is to come in and screw everything up, not follow the plan, and not respect the brand, stop right now. Clearly, franchising is not the right path for you. But if you are excited about coming into a brand that’s well-established and protected, then rejoice! That’s what franchising is all about!
Those issues make up a good chunk of the document. Probably about the first one-third of the FDD is going to be those 23 Items. They cover basic topics that are going to be standard for every franchise.
The Financial Side
The other part of the FDD is the beginning of the financials. There will be three sections in the document that will outline the costs and fees associated with owning each different franchise. A lot of these will be ranges – for instance, if a franchise requires office space or retail space, the difference in what that will cost in Manhattan, New York, versus Manhattan, Kansas, will certainly cause some variance.
The FDD is an excellent place to gain a beginning understanding of these financial considerations. Most FDDs will also have what is called an “Item 19,” which will be the financial performance information of their existing owners. In other words, revenue reporting – how much are they making?
Usually, this is tiered. You might see the data broken up into the top one-third of revenue producers, the middle one-third, and the bottom one-third. You will also sometimes see it broken up by years – owners who have been in business for two years versus ones who have been in business for five years, etc.
How Much Will I Make?
There is one very important piece of information to remember as we get into the financial side of things: This is not the place where you are going to get definitive final answers. There is no “X marks the spot.” You won’t find out that on year three, day four, you will make X amount, or on month six, day seven, you will make Y.
Remember, the FDD is just the beginning of the financials. But it is very helpful when it comes to starting to get a picture of what can be done.
There is another common misconception we want to highlight. Many times, people look at the tiers and feel that somebody in the bottom half or bottom third revenue-wise is unhappy. But that is not always the case.
Oftentimes, those owners just have different goals than the person who is at the top of the chart – and that’s okay. Not everybody has the goal of being a brand’s top producer. Perhaps they need a little bit less or are more lifestyle-focused.
When you are looking at the FDD, you really want to get an understanding of some good averages and some base information. That way, as we move farther in the process with the franchisors and you get started talking to owners, you have data points to think of when you start having financial conversations with them.
Do I Really Have to Read This Whole Thing?
Between the 23 Items and the financial aspects, that covers the first one-third of the FDD. The latter two-thirds is going to end up being the template of the Franchise Agreement that you will eventually sign and any addendums that go with that.
Now, let’s say that you are paired with three franchisors and have three FDDs to tackle all at the same time. Is it really necessary to read all three Franchise Agreements?
In short, no. You certainly can, but at the beginning, it is more important to focus on the Items – those 23 pieces that are at the start of the FDD and can help you gain an overall understanding. There is rarely a real decision or “Aha!” moment in an FDD that is going to make you go, “This brand is great!” or “This brand is terrible!”
Every now and then, franchisors will send an FDD over and say “Hey, let’s schedule a call after you read through it.” We highly recommend that you just get that call on the calendar. Otherwise, the process tends to drag on a little bit. But you will always have an opportunity to have at least one phone call about the FDD with the franchisor, during which you will be able to review any questions and gain more clarity. The Update Calls you have with FranCoach will also help you build an understanding of the FDD.
What Happens Next?
When you get toward the end of the process and have kind of identified that Franchise X is the one for you, then it’s time to take a closer look at the Franchise Agreement. Typically, it mirrors the FDD, so there should not be any major surprises or any dramatically new information in there. Still, you will want to read through it.
Usually, it is all pretty clear. Very rarely does anything change in the Franchise Agreement, so we will not be going in there to redline half of it or to negotiate the franchise fees. These documents are very standard agreements, made to stay the same across the whole brand – that is kind of the whole point of a franchise.
If somebody wants to have a legal review of their FDD and Franchise Agreement, the time to do that is toward the end of the process. If that’s the case, understand that it is imperative that you use a franchise attorney to review the franchise agreement.
Just because your Uncle Bob is a great family lawyer doesn’t mean that Uncle Bob knows the first thing about franchise agreements. One of our favorite examples to use is this: If you had a fantastic accident attorney that helped you out when you got rear-ended and then you tried to use that same attorney for your divorce, it likely would not go well. There are specialties within the legal field for a reason.
Typically, you are going to be looking at $2,000 to $3,000 dollars for a franchise attorney to review the agreement. Some people like that peace of mind, so if you do want to get a franchise attorney involved, the end of the process is the time to do it. Most people opt not to, but we always want to make sure our clients know that it is an option.
We have some franchise attorney partners that we can refer you over to, but it is always easy to find one in your local area as well. We will go over this process in more detail as we get into the FDDs. Just know that once you receive the document, understanding it will be an ongoing process.
Don’t let it bog you down. Don’t think this is the be-all-end-all of how you are going to figure things out. The FDD is simply a place to get basic information about the franchise, brand protection, and the beginnings of its financials – we’ll work through it together from there.
As we work with our clients on FDDs, we’ll stay in close contact and help you through each step. The FDD is definitely a key element of the discovery process as we vet franchises, but it is really just one piece. It’s not the most important thing by any stretch of the imagination – it just happens to be the biggest legal document in the process.
If you are embarking on the process of franchise ownership now or plan to in the future, we hope this article was helpful and informative. While FDDs may be intimidating, there is no need to get too overwhelmed. When you work with an industry expert like FranCoach, you’ll have support every step of the way.
So Who Are We Anyway?
FranCoach is a national search firm dedicated to working with individuals who are interested in owning a franchise. We've partnered with over 600 of the top franchisors in the country, spanning nearly 70 industries.
Our number one goal with our clients is to help them find the absolute best franchise for them to own. Our goal with our Franchising 101 podcast series and this series of informational articles is to help educate people on all aspects of franchise ownership.
Reach out to us to learn more about potentially becoming a franchise owner. There’s never any fee for our service, so why not take the first step today toward your better tomorrow?