In this month’s blog, Team VetCor is focusing on educating our franchise candidates on the Franchise Disclosure Document (FDD). The FDD is probably the single most important document you’ll review during the franchise investigative process. The purpose of the FDD is to give potential buyers verified and validated information, so that one can make an informed decision on purchasing the business concept.
A couple of things to note before you get started. The Federal Trade Commission (FTC) requires franchises to provide their FDD to any prospective franchisee. You must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. There are 23 distinct sections to go over, known as “items”. So, as you review, here are five key areas to focus your attention:
Item 1:
In this section, you’ll find the complete history of the franchise offering. You may discover that the brand has been in business for years, but only recently entered into franchising their concept. Item 1 also reveals the true and accurate ownership of the franchise brand. Any parent companies, trusts, partners, investors, or the like must be disclosed.
Item 7:
Although individual fees and costs are disclosed in earlier Items, this section collates all of the financial information in one place, providing you—the interested buyer—with exactly what they require of you to invest in the franchise concept. It’s meant to cover all associated costs with opening a business under their brand name. In other words, it’s a comprehensive look at the total investment required.
Item 9:
If you want to know exactly how the roles of franchisor and franchisee go together, this is the section that spells out everyone’s obligations to one another. This can vary quite a bit depending on the brand, so be sure to ask questions if you’re unsure of a certain responsibility in the operational process.
Item 12:
If you want to know what kind of exclusivity you’ll have in operating a franchise in your particular area, pay close attention to Item 12. It’s designed to provide you with exact specifications for territories, areas, and operational coverage.
Item 19:
Time to perk up your senses—this is a section where you really need to pay attention. Item 19 deals with a franchisor’s financial performance and standing. The FTC’s Franchise Rule doesn’t require franchisors to provide sales or earnings information, but almost all brands do. Any claims made about sales, income or profits must be disclosed in Item 19 and no other spoken or written claims about financial performance are allowed if they don’t also appear in Item 19. It’s best to review this section with professional legal and/or accounting help.
Understanding the FDD is key to understanding the full scope and potential of a franchise ownership opportunity. It’s an important step in the investigative process that you should take seriously. Earlier this month, we presented our monthly webinar on this very topic. Here’s the recording:
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