When either discussing the prospect of opening a franchise with a representative at a franchise expo, or when meeting with a potential franchisor for the first time, you should expect to be given a Franchise Disclosure Document (FDD). Franchisors are legally obligated to provide these documents to potential franchisees. If you are not provided with one, you should ask. These documents contain some key data that will prove useful in determining if the intended franchise is truly suitable to your needs and business goals.
By law, the franchisor is required to present this documentation written in “plain English” (i.e. without legal jargon or highly technical terms). There are very clear guidelines as to what information must be included in the FDD. As such, there are some very specific areas of the document you should acquaint yourself with as you decide if the franchising organization is the right one for you.
Company Information
The initial sections of the FDD are concerned with giving an overview of the franchising company. In these sections you will find information about the company’s history and its internal structure. The FDD will also disclose any litigations against the company, as well as any bankruptcies. This information is definitely worth becoming familiar with as you decide if the company you are looking at is really suitable for your needs.
These section of the FDD can be very telling as to the way that the company operates internally, as well as how it relates with and resolves disputes with its franchisees. Not all franchisors are created equally, and hitching your wagon to an unstable star can prove disastrous. It is important not only to note how issues have been resolved, but to notice if there are patterns that might adversely affect you and your business.
Financial Disclosures
The law also stipulates that certain financial aspects of the franchisor/franchisee relationship be disclosed in the FDD. It is important to understand that the franchisor is not obligated to provide information speculating what you might expect as a Return On Interest as a franchisee. In fact, many companies refuse to do so and wisely so. Giving concrete figures on expected ROI opens the company up to possible legal accountability should the franchise fail to live up to expectations.
What the company is required to disclose is information pertaining to the cost associated with becoming a franchisee. This is information relating to liquid capital requirements (start-up costs), total investment requirements, franchise fees and the like. There will also be financial information included showing the average earnings of franchises operating in different localities. These figures should be viewed as speculative earning potentials and not as any sort of definitive statement of what you might expect to earn.
Understanding the FDD
Fully comprehending the information disclosed in a company’s FDD is an absolute necessity for any prospective franchisee. There is a reason that companies are legal required to make this information available and accessible in plain speech. This document is your key to deciding if a company is a good fit for you and your business goals prior to contractually tethering yourself to a franchising organization. Read it, discuss it with your attorney, understand it and arm yourself with the knowledge necessary to make an informed financial decision about your investment.
Have additional franchising questions? Get more franchise information with a real business example at Filta Fry . Additionally, you can get more information about an emerging franchise by going to filtafry.