Selecting a Franchise: The Franchise Disclosure Document

Once you have filled out the franchisor’s questionnaire, the next step is normally for you to be given the legal disclosure document called the Franchise Disclosure Document (Also known as the FDD or disclosure document). If you meet the franchisor face to face, and you discuss the sale /or purchase of a franchise, you must, by law, be presented with this document at that meeting. 

The Federal Trade Commission (FTC) requires sellers of franchises and other business opportunity ventures to provide prospective investors with the information they need to make an informed investment decision. When you get the FDD you will sign a receipt, which you will also date, to prove that you have received this.  It also requires that all earnings claims be documented, that the information investors receive be complete and accurate, and that investors have adequate time to consider and evaluate the disclosures before making any final purchase commitment. All required information is given to prospective investors in the form of a franchise disclosure document, which must be furnished at least 14 business days before any purchase may occur. This document includes 20 important items of information, such as…

• Names, addresses and telephone numbers of other franchisees.
• A fully audited financial statement of the seller.
• The cost required to start and maintain the business.
• The responsibilities you and the seller will share once you buy a franchise.
• Litigation involving the company or its officers, if any.
• Again, use your professional support to examine all of these issues. Some of the contract terms may be negotiable. Find out before you sign; otherwise, it will be too late.

Read the documents CAREFULLY!  See if there are any deal breakers here.  There will be all sorts of good information in it on over 20 different topics, including the background of the officers, any litigation that the franchisor is involved in, audited financial statements on the franchise company, your costs and obligations, their obligations, any statements on projected sales and/or earnings and perhaps, most importantly, a list of all the franchisees!  To me, this list of franchisees is the key to the entire selection process.