How To Read A Franchise Disclosure Document (FDD)

Entrepreneurs who are considering investing in a franchise will probably shop around for the right brand to fit their vision. While the businesses, costs and requirements will all vary company to company, one aspect of the process will always remain the same: franchisors will provide potential investors with a Franchise Disclosure Document (FDD). 

Franchisors are legally required to provide FDDs to potential franchisees. The document gives buyers in-depth data about the company, its franchising process, what it expects of franchisees and what franchisees stand to gain. The Federal Trade Commission made the FDD requirement a part of the 1978 FTC Rule. 

All FDDs include 23 items, or sections, that detail the ins and outs of the franchising opportunity. The entire document can often include 200 pages or more. Reading it with a layman’s understanding of franchising can be a daunting task, as it is an extensive, jargon-filled document.

“The Franchise Disclosure Document is a valuable tool in the research and due diligence process,” Ted Fireman, franchise expert at FranNet said. “It should be read carefully, and a list of questions should be prepared for the franchise company.”

Eric Estes, owner of Brook Forest Franchise Consulting, outlined a few of the most important Items, which typically are included in the first third of an FDD.

“Item 7 is the amount that a potential franchisee can expect to invest. Item 19 is what everybody gravitates towards since it's the expected earnings section. I recommend that people examine the "Other Fees" in Item 6 and any litigation outlined in Item 3,” said Estes.

After the 23 items, the next part of the document is the franchise agreement. The franchise agreement is where prospective franchisees “find out the limitations, the ‘velvet hand-cuffs’ sections, the penalties for wanting out early and the typical non-compete/non-disclosure elements,” said Paul Stewart, president of franchise associates. 

“It can be intimidating, but you must read it. Don't be shy about asking questions for clarity and for additional information,” said John Anderson,  franchise broker at Lakeport Franchise Group. He advises his clients who are overviewing FDDs to enlist the help of an expert if need be. There are dedicated franchise attorneys and contract lawyers who can walk a prospective owner through the document.