Franchise disclosure documents
The franchisor/franchisee relationship is crucial to the success of any franchise agreement. Investors need to be happy with the help and support that they receive from the parent company and the franchise itself needs to know it can rely on its franchisees to work hard, build their company and help drive the business’ success.
A big part of ensuring the franchisor/franchisee relationship is productive and viable is building trust between the two parties. The more a franchise knows about its investors, and the more investors know about the franchise, the more likely it is that they’ll be able to build the foundations of a solid business relationship.
One of the most important tools for creating an open and honest dialogue between the franchisor and the franchisee is the Franchise Disclosure Document. An incredibly important piece of paperwork, the FDD tells prospective franchisors everything they need to know about the brand and gives them the information they need to decide if they’re going to put their money into the franchise. If you’ve recently received an FDD as part of a franchise purchase, or if you’re simply trying to find out more about franchising arrangements, keep reading.
What is a franchise disclosure document?
Franchise disclosure documents date back to the time when franchises, and their salespeople, played a little fast and loose with the truth. Before the internet, checking the veracity of a company’s claims, and the reputations of the people behind the brand, wasn’t always easy. As a result, franchisees would all too often find that they’d put their money into a business opportunity that was too good to be true and would lose their investment as a consequence.
Franchise disclosure documents were introduced to ensure that franchisees had all the information that they needed before deciding whether or not to invest. The FDD should be laid out in a fairly prescribed format and should cover all the most important issues relating to the business. When you receive your FDD, you’ll have a set amount of time to read through its contents and raise any queries with the franchise. Once you’re happy with all the information the document lays out, it’s time to decide if you’re going to become a franchisee.
What information should the franchise disclosure document contain?
There are 23 points that all FDDs need to address. Going through each point carefully will help to ensure you don’t miss anything and that you know exactly what you’re getting in to.
– The Franchisor and Any Parents, Predecessors, and Affiliates
Firstly, the FDD needs to give the franchisee a little more information about the franchisor. The document should provide details about how long the franchisor has been in business, if there are any special laws pertaining to the industry they’re involved in and if the company has any major competition. This information should help the franchisee to get a better idea of the risks they’re taking when they invest in a particular franchise.
– The identity and business experience of the key persons involved
When investing in any company, it’s important to know a little about the business history of the people who run the company. The FDD should give a detailed account of the professional experience of key people within the organisation.
– Litigation
The third section of the document should provide information on any past legal action against the franchise or key people involved with the business. This is obviously a very important part of the document and needs to be read thoroughly before the franchise agreement moves forward.
– Bankruptcy
The financial history of the people involved in the business is just as important as their professional history. This section will tell franchisees if any key people involved in the company have ever declared bankruptcy
– initial fees
This section gives information about the initial fees and costs involved in starting a franchise. This could include the cost of renting premises, creating signage or purchasing products for an initial inventory. It should also provide information about on-going costs like royalties and marketing fees.
– Other fees
This section gives franchisors the chance to detail any other fees or costs involved in running a franchise.
– Estimated initial investment costs
In this section you should get an overview of the total amount you’ll need to invest in your franchise and how these finances break down.
– Restrictions on sources of products and services
If, as a franchisee, you have to buy your products and/or services from a specific supplier, this information should be provided in the FDD. If you have to buy from the franchise itself, they need to make it clear whether they’re making an extra profit from this aspect of the business.
– Territory
Although franchisors aren’t required to provide their franchisees with an exclusive or protected territory, if this is part of the agreement, it needs to be detailed in the FDD.
– Trademarks
This section of the FDD details any trademarks associated with the business.
– Patents, copyrights and proprietary information
In this part of the FDD the franchisor will need to outline any patents, copyrights and other proprietary information owned by the franchise.
– Obligation to participate in the actual operation of the franchise business
While some franchises may not require franchisees to oversee the everyday running of the business, others will. This section will explain how your chosen franchise operates.
– Restrictions on goods and services offered by the franchisee
Some franchisors may place limits or restrictions on the goods and services a franchisee can offer. Understanding these limitations is important if you’re going to become a franchisee.
– Renewal, termination, transfer and dispute resolution
This section describes the circumstances under which the franchisor can terminate the relationship with the franchisee and also how the franchisee can sell or transfer their business to another investor.
– Public figures
In this section the franchisee can find out about the public figures associated with the brand.
– Financial performance representations
Although franchisors are not obligated to provide their franchisees with any information on sales, earnings, or expenses, if they plan to, this is the section where the information should be contained.
– Outlets and franchisee information
For franchisees, this is one of the most important parts of the FDD. It details all the franchise’s existing outlets and lists its current franchisees. If there is a concentration of locations in a particular geographic area, it could mean more competition for the prospective investor.
– Financial statements
In this part of the FDD franchisees should find in-depth information about the company’s financial status, including audited financial statements.
– Contracts
In this part of the FDD franchisors will need to provide franchisees with any contracts that need to be signed.
– Receipt
This is simply the part of the FDD where a franchisor can document that a prospect received the document.
An incredibly important part of the journey to becoming a franchisee, the FDD is essential reading for every potential investor. To find out more about the franchise process and get franchise advice, take a look around our site today.