How To Build an FDD When Franchising Your Business

Every business that sells franchises must draft and maintain a Franchise Disclosure Document to show all prospective franchisees that explains the brand’s operations, fees, rules, turnover rates, renewal terms and more. 

So for a successful business concept that’s looking to recreate itself, creating an airtight FDD that makes the business look not just good, but investable, is a necessity. 1851 spoke to industry experts on how to craft an FDD that will make it easy for franchisee candidates to sign on the dotted line.

What Is An FDD?

The FDD must include 23 specific “Items” — or sections — and often includes other information or exhibits. Franchisors must give prospective franchisees 14 days to review the document before any binding agreements are signed. 

After all, the FDD can be an intimidating document. They often span more than 200 pages and can frequently slip into jargon. The document needs to cover the brand’s leadership, what happens in the case of bankruptcy or litigation, all fees and expenses, financing terms and territory availabilities. 

To craft this complicated, legally binding document, hire an attorney.

How To Write A Strong FDD

The FDD must meet legal standards and show a brand’s finances, warts and all, but franchisors should still try to make themselves look good.

According to Mark Siebert, founder of the franchise consulting firm iFranchise Group, franchisors should keep in mind that a potential franchisee might look at their competitors' FDDs too. Understand that your FDD must show competitive numbers, but “the way to make your business look good in an FDD is to make good business decisions,” said Siebert.

Pulling a royalty percentage out of thin air to beat your competition’s price point doesn’t really represent sound business decisions, he said. 

Jack Armstrong, New Jersey market president of FranNet, a franchise consulting firm, said that a strong business’s FDD will show happy franchises and strong sales. In FDDs, Item 19 gives projections of how much money a franchisee can expect to make with the brand. 

“First, look at how Item 19 is based,” said Armstrong. “Is it based on a number of units or a couple of company units? How solid is that earnings claim? A strong company will have a strong balance sheet. A well-established company will welcome you to call any franchisee in the system.” 

Siebert seconded Armstrong’s point. Ultimately, an FDD requires a factual accounting of a business's operations, and if a business is profitable, it should be able to prove it with numbers.

“The Financial Performance Representations in Item 19 used to be something that was occasionally done. Now we’re seeing it done with a greater level of frequency, and it’s almost mandatory in a lot of different businesses,” he said. 

How To Get Validation Without Franchisees

Having happy franchisees helps sell franchises. But a business won’t have franchisees when it first writes an FDD. For that reason, you can’t rely on other business owners vouching for you, but you can still make a strong case for yourself.

First-time FDDs should focus on the unit-level economics of the brand’s existing units. Focus on the scalability of the brand and its success. Producing manuals or brochures on operations, as well as having patents or proprietary processes, all represent strong selling points.

Ultimately, every great franchise brand started with an FDD, so stay factual, focus on the positives, and if the market wants to buy it, your franchise will sell.