How to navigate the FDD
How to navigate the FDD

Dear Aaron,

We are buying a franchise and just received the Franchise Disclosure Document which is the equivalent length of the novel, Moby Dick. Are there any tricks to reading this thing?

Signed,

Drowning In Paperwork

Dear DIP,

There are no tricks when it comes to the Franchise Disc.....

Dear Aaron,

We are buying a franchise and just received the Franchise Disclosure Document which is the equivalent length of the novel, Moby Dick. Are there any tricks to reading this thing?

Signed,

Drowning In Paperwork

Dear DIP,

There are no tricks when it comes to the Franchise Disclosure Document or as it is referred to in the industry, the FDD. It was originally known as the Uniform Franchisee Offering Circular (UFOC) and is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process.

There are 23 items in the document which cover many topics and a lot of ground including history of the company, executive backgrounds, potential fees, lawsuits, and three years of audited financials. You’re correct; they can reach the size of a telephone book with legal jargon that requires the hiring of an experienced franchise attorney to navigate.

There are some items that you should pay close attention to since you are considering getting into bed with this franchise. Some of those include Item 2 which covers the executive team and gives a detailed account of their past history, or Item 3 which alerts you to all and any past legal action that was taken against the franchise or their leaders, including fraud and bankruptcy.  There is also Item 7 which gives you a breakdown of the initial investment and franchise fees as well as Item 19 which gives you financial performance figures to help determine potential earnings.

Sean Fitzgerald, Chief Development Strategist for No Limit Agency, also recommends looking closely at Item 20 which gives you the total franchises in the system and the number added or left the system and Item 21 - the company’s audited financial statements.  “You want to also be sure to call existing franchisees and evaluate their experience with the franchisor and their EBITDA,” said Fitzgerald. “This will help you get a better idea of what you can expect as an owner.”

A company’s EBITDA is an accounting measure calculated using a company’s net earnings, before interest expenses, taxes, depreciation and amortization are subtracted, as a proxy for a company’s current operating profitability, i.e., how much profit it makes with its present assets and its operations on the products it produces and sells, as well as providing a proxy for cash flow.

Ultimately, an FDD is supposed to protect a potential buyer of a franchise so you should take the time to read it yourself. It’s no Moby Dick, but can help you find any deadly white whales to look out for when making one of the biggest investments of your life.

Hope this information helps you DIP. For more FAQ’s regarding FDDs you can visit the Bureau of Consumer Protection Business Center.

Best wishes,

Aaron

ADVERTISEMENT