Understanding the FDD

UNDERSTANDING THE FDD

How the Franchise Disclosure Document Works

By Telanda Sidari

One of the most important documents you will run into during a potential franchise purchase is the Franchise DisclosureDocument, or as it’s commonly called, the FDD. Granted, thedocument can be daunting with a lot of legal jargon, but it’s alsofull of information that lets you know exactly what you’re buyinginto. In fact, the FDD is the best way to understand the full scope of your business—and the key players involved with it. What exactly does this document contain? How can you use it to your benefit? Here’s an overview.

HOW IT WORKS

As you may know, the Federal Trade Commission (FTC) oversees franchising guidelines. Back in 1978, the FTC instituted a rule that franchisors had to fully inform potential franchisees about the business they were buying into. The purpose, of course, was to protect potential franchise buyers from sordid franchisor systems.

The FDD is essentially an open book on the business. And though the documents vary in quality, there are 23 points that every document must cover—from the background of the franchisor to hidden fees to bankruptcy to restrictions and financial statements.

The document is usually released at the start of a potential buyer’s research. This way you have plenty of time to review, re-read, and gather questions. If franchisors don’t release the document at the start of your research, they are required to provide the FDD at least 14 calendar days before a contract is signed or any payments are made. The document can arrive in print or via email.

Every year, franchise systems registered with the FTC are required to renew the document with updated information and figures. A 2018 FDD will show you how much it costs to invest into the system this year, and you’ll get financial returns of locations from 2017.

Speaking of finances, a key component of the FDD is Financial Performance. About 70 percent of franchisors will show financial performance representations, but how they show the information varies. Franchisors can’t provide more than what’s already in the FDD, but they can speak to you about anything listed in the FDD.

If you have questions, go beyond the franchisor. Franchisees can speak to you about how much they make, and will let you know about how the franchise system performs and also what support is like.

ALWAYS ENLIST AN ATTORNEY

While the FDD may seem overwhelming, reading and understanding it is an important step in the franchise-purchasing process. If you understand the document, you can make an informed decision about your franchise purchase. To ensure that you and the franchisor are on the same page, hire a franchise attorney to help translate the document.

The purpose of a franchise attorney is to help explain the document and let you know the ins and outs of the franchise business. However, the attorney isn’t there to change the document. Compare the FDD to a bank mortgage contract—the contract never changes, but you still have to understand what it says.

The FDD might not have all the answers you’re looking for, but it’s an important part of your research. Take it seriously, understand it, always ask questions, and you’re off to a successful start in your franchise purchase.

Telanda Sidari has 20 years of business experience with almost a decade in the franchising industry— from business ownership to sales. Ms. Sidari has first-hand experience in the emotional steps involved in buying a business. She helps clients navigate the process. For more information, email her at Telanda@TheFranchiseConsultingCompany.com