A franchisor will send you the company’s Franchise Disclosure Document (FDD) once you have filled out an application and indicated serious interest in the franchise.
The FDD very clearly defines what the franchisor will do for you and what s/he expects of you. There are 23 important parts to review.
The Federal Trade Commission (FTC) protects franchisee prospects up until the point of sale, but once the franchise is purchased, the FTC looks upon the business as any other start up so the UFOC becomes vitally important in providing you protection at this point.
You will probably want to have an attorney review the FDD, but it is crucial that you understand every statement in each of the 23 parts.
Items 1 through 4 – describe the franchisor, his background, business ethics and possible bankruptcy history.
Items 5 through 10 – deal with the fees, royalties, advertising fees and all financial arrangements including restrictions as to sources of products and services.
Items 11 through 19 – detail the franchisee’s obligations and provisions in the agreement. These are very important as they define what restrictions there are on products that can be sold, transfer assignments, terminations, dispute resolutions and the like.
Items 20 through 23 – provide a list of existing franchisees, both active and those who have left the system. They also provide financial statements of the franchisor and copies of contracts used in connection with the franchise offering, including the Franchise Agreement.
Item 20, the list of franchisees, is one of the most important items and provides a valuable opportunity to call or visit many existing stores or services. It is crucial that you call many of the existing franchisees to determine their level of satisfaction. You need to know if the franchisor delivers his promises, and this is the best possible way to find that out.
SCORE has over 12,400 volunteers ready to help mentor you, many of whom have franchise experience. Seek help from your nearest SCORE office or online counselor. SCORE counseling is always free and confidential.
Betty Otte has 16 years of franchising experience in running a multiple unit franchise territory, selling franchises and in acting as a franchisor liaison. She is a District Director for SCORE Orange County and recipient of SCORE’s Platinum Service Award. Betty serves on SCORE’s Marketing Advisory Council, which represents the field in regards to SCORE’s national marketing effort.
Have a question about FDD's? Connect with a SCORE mentor online or in your community today!