What is a FDD?

What is a FDD?

The Franchise Disclosure Document (FDD), mandated by the Federal Trade Commission, is the legal document presented to candidates a minimum of two weeks prior to signing the Franchise Agreement. The FDD explains the Franchise Agreement in easy to understand terms and outlines the entire history of the franchise company. This document is broken out into 23 items describing every aspect of the company.

There are a few sections that are very important to understand before signing the agreement:

Item 5, 6, and 7 – Fees and Investment – Since all franchises aren’t the same these sections break down the differences. The majority of franchise companies offer a 10 year initial term contract, but others will reduce their franchise fee and their initial term to appear less expensive. For example, if Company A has a $25,000 franchise fee for a 10 year agreement and Company B has a $20,000 franchise fee for a 7 year agreement, Company A is actually the more affordable option (by more than $8,500) on a prorated scale because you have to renew after 7 years with Company B.

Item 19 – Financial Performance – This may be the most important section of the entire FDD because you will use this information to form your own pro forma and business plans. Smart companies will transparently disclose their corporate location(s) full P&L’s as well as the franchise locations sales. It is important to see other locations in the system are making money. Non-disclosure of full P&Ls and open location earnings is a red flag that could lead to the assumption that these other locations are not profitable.

Item 20 – Outlets Info – This section shows the true success of the company. It includes tables to show the growth rate of the company and if any locations have closed or transferred from one owner to another. Many closed locations and units transferred between owners can be interpreted as signs of a weak system., Speed of growth is also something to look at; look for patterns by asking questions,

“Did the company grow quickly in the beginning and then slow?” or

“Was their growth slow in their earlier years then speed up?”

A slower growth shows a company with a planned and executed growth strategy in comparison to a company which opened many locations quickly then stopped. The later; example could be the symptom of a system that is in recession due to the lack of a growth strategy, training, support and foundation.

These are a few sections that I like to look at when evaluating franchise companies, but every section is important to understand thoroughly. Take your time to read all of the details ask questions of the franchisor and review with trusted professionals.

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