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Reading a Franchise Disclosure Document (FDD) is probably not as fun as reading a good crime novel, but it provides most of the guidance that you must find the best franchise for yourself. Plus, you actually don’t need any secrets when you are looking at franchises – you’ll be wanting to grasp the most vital facts presented to you so that you just have all the pieces that you must make a good decision.
The Federal Trade Commission requires all franchise corporations to offer potential buyers with FDDs organized in a common format to permit for reasonably easy comparison of franchises. Think of it as the Most worthy written tool you’ll receive in the franchise research phase.
The FDD consists of 23 sections (called “items”) and exhibits containing supporting information. Here’s the full breakdown so you possibly can understand FDD from the inside out.
Positions 1-4: (*23*)
Item 1: A general overview of the company, including any predecessors and affiliates, and an overview of the opportunities offered. This key company overview is one of the sections it is advisable to review first.
Position 2: Basic data regarding key members of management, directors, employees and any other individuals with management responsibilities related to the sale or operation of the franchise. It comprises a summary of their skilled experience over the last five years and any other experience they have as officers and/or directors of other corporations.
Positions 3 and 4: These include disclosure of any past or current legal proceedings or bankruptcy of the company or its key employees.
Sections 5-7: Fees and costs
Position 5: Any start-up fees you will need to pay when starting a franchise business.
Position 6: Any other fees that could be required to proceed operating the franchise business – including licensing fees, promoting fees, renewal fees and transfer fees.
Position 7: An outline of each element of the initial investment you’ll need to make in your franchise business – including initial promoting allowance and operating capital reserves. This section is extremely vital, but the value of the information is limited by the incontrovertible fact that the franchise company is obliged to present data in a tabular form containing ranges of potential costs. Review this section with current franchisees and the franchisor to find out the most accurate estimate possible for your specific location and circumstances.
Sections 9, 11 and 15: Obligations of the franchisee and franchisor
Position 9: Your obligations (as a franchisee) in tabular form. The table lists the important areas of responsibility in the company. For example, the responsibilities of finding a real estate location for your small business. It then provides detailed references to the exact sections of each the FDD and the actual franchise agreement that outline the legal obligations you are assuming. While it could appear tedious and burdensome to finish all the cross-references required by the format in this section, it is essential to your investigation. You should first read the entire FDD and Franchise Agreement to build a solid general knowledge base before going back to #9 and double-checking each reference in the table.
Position 11: Franchisor’s contractual support obligations. This is normally the longest section of the FDD. However, this is very vital because it tells you what you’ll receive in return for the fees you pay. This section describes pre-opening assistance and ongoing assistance. It also includes detailed information about the franchisor’s training programs and any required franchise systems, resembling computerized point of sale or promoting programs. Be sure to notice all vital information in this section, in addition to any questions you might have.
Position 15: Explaining exactly what your personal responsibilities are in running your franchise business.
Position 12: Territory
Position 12: What do you get as part of a protected or exclusive territory. You’ll find quite a lot of variation in this recipe from franchise to franchise.
Most potential franchisees intuitively consider that the larger the protected territory, the higher for them. On the contrary, as a rule, the handiest and well-known franchise systems normally offer territories that are either very limited or sometimes have no protected territories at all. Discuss this in detail with your franchisor to make sure you understand and agree with their philosophy on this vital issue.
Position 17: Any restrictions regarding the extension, termination or transfer of your Franchise Agreement, in addition to definitions of the required dispute resolution methodology. You should consider any fees and restrictions you’ll face when selling your small business well before you get to the point where you should sell.
Dispute resolution provisions requiring negotiation and/or mediation before taking legal motion are quite common in franchising. It is also quite common to require binding arbitration quite than lawsuits in state or federal courts, although these types of provisions are not as common as they once were.
Item 19: Information about financial results
Position 19: Franchisers’ statements regarding the financial performance of their entities. This is often the first book that potential franchisees read to search out the answer to the most continuously asked query in franchising: How much money can I make in this business?
But point 19 won’t ever offer you the answer to this query. In fact, the disclaimers of any representation of Section 19 you’ll ever see will make this point as clearly and forcefully as possible. Every franchisee is different, every site is different, and it is inconceivable to predict what future financial results you might achieve. Item 19 can provide – and is extremely useful – useful suggestions which you can use in your personal research to reply the query of how much money you possibly can make.
A typical Item 19 disclosure consists of three types of information: 1) a numerical presentation of revenue and/or expense data, 2) notes and explanations outlining the assumptions used in preparing these numerical presentations, and 3) disclaimers that rigorously explain the limitations of the usefulness of the data presented.
It is very vital to rigorously review and analyze the clues obtained from each of the three types of information. If, for example, this section states that at the time of data collection, all units used to calculate the numerical presentation were at least two years old, it must be obvious that the presentation won’t be relevant in determining what your results could also be as in the first yr of your operation corporations.
Item 19 could also be one of the most vital sources of information you’ll receive in the entire FDD. The secret is to be extremely careful and use information only for what it is intended to convey, and then confirm it with existing franchisees.
Item 20: Existing entity data
Position 20: Information in tabular form about the number and location of existing units in the franchise system. By requiring franchisors to reveal the numbers of units that have transferred ownership or closed, you get information that may allow you to form an opinion on the growth and success rates of the system.
Items 21 and 22: Financial statements and contracts
Position 21: Audited franchise financial statements for the previous three years. Check these financial statements to find out the financial strength and stability of the franchisor, as you won’t receive any future assistance if they go out of business. If this is not a topic you are familiar with, seek assistance from your accountant or someone familiar with financial plan evaluation to help you in reviewing and forming an opinion.
Position 22: All agreements you might be required to enter into in connection with becoming a franchisee, including the actual franchise agreement and other agreements covering personal guarantees, task of real estate, promoting, cooperative terms and conditions, and territorial development schedules.
Other rules, restrictions and general information
Items 8, 10, 13, 14, 16, 18 and 23 contain vital information regarding the franchise. Some of these sections address policies, resembling where you should purchase supplies, what products or services you possibly can offer, and what your personal participation responsibilities are. Others include information about any financing programs available through the franchise, any public figures involved in promoting the company, and the status of all trademarks, patents and copyrights. In addition, each FDD comprises standard exhibits with a required list of state-specific information and other “housekeeping” matters.
By taking a careful, systematic approach to absorbing the vital information available through FDD, you possibly can go a great distance toward solving the puzzle of whether a particular franchise is right for you.