Every franchisee’s journey starts with a critical step: encountering the Franchise Disclosure Document (FDD). As the cornerstone document of the franchise relationship, the FDD is your outline of what you need to know about the offer you are potentially agreeing to. It will list everything from territorial rights, brand trademarks, and initial fees and requirements.
As a first-time franchise business owner, you might be intimidated by the FDD. That is why we pulled five of the most critical parts of any FDD to explain in detail below, but encourage you to read the entire document for any franchise that you are seriously considering.
What Is a Franchise Disclosure Document?
As defined by the Federal Trade Commission, a Franchise Disclosure Document is mandatory for any prospective franchise relationship. You must be given a copy of this franchise paperwork at least 14 days before any contractual commitment or financial transaction. This document has 23 comprehensive items that will provide you with an understanding of the franchise’s operations, ethos, and legality.
This document is a transparent company-provided resource for you in your evaluation process, so it is a huge red flag if a franchise company drags its feet on providing the FDD to you or avoids answering what an FDD is.
FDD Checklist: 5 Key Items to Review
While you should read and understand the entirety of the FDD, certain sections are particularly important when you are evaluating a franchise opportunity:
FDD Item #1: Overview and History
Item #1 of the Franchise Disclosure Document is your introductory chapter to the franchisor’s narrative. This section is where you’ll uncover the roots and evolution of the brand.
- Company Genesis: Understand when and how the company entered the franchising world, offering a timeline of its growth and development.
- Brand Evolution: Insights into any name changes or rebranding efforts that have shaped the current identity of the franchise.
- Corporate Family: Identification of parent or sister companies, revealing the more extensive network your potential franchise business is part of.
- Risk Assessment: Initial scrutiny here can spotlight potential risks and costs, helping to frame your financial and strategic planning.
Item #1 sets the stage for validation calls with franchisees. This call is your opportunity to probe deeper and ask informed questions to gauge the franchisor’s standing from an insider’s perspective. This initial review and subsequent dialogue lets you determine whether this franchise opportunity aligns with your business goals and values.
FDD Item #7: Initial Investment Insights
Securing enough capital to cover startup costs often tops the list of importance for potential franchisees. Within Item #7 of the Franchise Disclosure Document, you’ll find a detailed breakdown of these initial investments. This section will cover everything from equipment and labor to software and development fees.
This section is about transparency, so you know the payment timelines and who’s involved in each transaction. While lower-cost investments are appealing, cost isn’t the only factor to consider, and you’ll want to ensure you understand this part of the FDD to see if the investment truly aligns with your goals. It helps you prepare for the financial commitment of starting a franchise, paving the way for a more informed and confident entrance into the franchise world.
FDD Item #9: Franchisee Obligations
Item #9 in the Franchise Disclosure Document sets these expectations.
- Item #9 clarifies the franchisee’s responsibilities. It should provide complete transparency between the franchisor and the franchisee.
- It’s presented as a table of contents, directing you to other FDD and franchise agreement sections for more detailed explanations of each obligation.
- This structure helps you understand the full scope of your role and operational requirements.
- If anything is unclear, you should ask the company for clarification to maintain a mutual understanding.
Item #9 is there to make sure you have full access to understand your commitments and responsibilities. This knowledge is the foundation of a successful franchise operation.
FDD Item #19: Financial Projections
One of the most critical sections of the FDD, Item #19, serves as your financial compass, guiding you in understanding other franchisee earnings so that you can analyze whether this is in range for your goals. The earnings listed in this section give you a snapshot of how others have done so you can make your own evaluation of revenue and forecasts.
It’s a vital part of the franchise paperwork and can be useful for understanding potential return on investment (ROI). When you read through Item #19 of the Franchise Disclosure Document, you’re envisioning documented performance against your own personal objectives and goals. Remember, item #19 provides historical performance of franchisees in the system as of the reporting periods or projections with a reasonable basis.
FDD Item #20: Growth and Stability
Item #20 stands as a documentation of the overall size and strength of the business, reflecting the brand’s growth and the robustness of its franchise system. As you go through this section, five tables highlight the franchise’s expansion or contraction over the last three years. Similar to company notes in an Annual Report of a publicly traded company, you can gain insight into the current situation and the franchisor’s vision for the future. These figures are signals that can boost your confidence, solidifying your decision to become a franchise owner as you prepare to sign on the dotted line.
Becoming a Franchise Owner: Beyond Knowing What Is in an FDD
Understanding the Franchise Disclosure Document is a pivotal step in your franchise journey, yet it’s only one resource and only the beginning of how to become a franchise owner. Getting clarity on your uniquely personal goals, engaging with current franchise owners, conducting independent research, and comprehending the broader benefits of investing in a reputable franchisor is integral to a successful franchise endeavor.
Neighborly®’s distinct approach to franchising encapsulates the values of respect, integrity, and customer focus, all while having fun in the process. To explore what sets Neighborly apart, accessing the Neighborly Franchise Ownership Guide is your next strategic move in this exciting business journey.
