bannerFranchise News

How To Read an FDD 101: A Basic Introduction to the Franchise Disclosure Document

To the uninitiated, FDDs can be daunting—here is an inside look at the FDD, including how to read it and what to pay the most attention to.

Whether you are an experienced, multi-unit franchisee or first-time candidate, reading a franchise disclosure document can be overwhelming. Made up of 23 sections called “Items,” FDDs provide prospective franchise buyers with a detailed, 200-page analysis of the business ownership opportunity they are considering.

1851 Franchise consulted franchisees, franchisors and franchising experts to provide some insider information on the FDD from all angles.

“To put it simply, an FDD is the legal documentation of the offering a franchise organization is selling to an awarded franchise buyer,” said Brian Knuth, VP of Sales at Raintree*, a franchise sales and development company. “It outlines the history of the business, fees, rules and restrictions, all the franchisees in a system, turnover rates, renewal terms and other aspects of a particular franchise.”

While an FDD is meant to be thorough, it is always written with the franchise candidate in mind. “The FDD features two distinct sections,” said Knuth. “Item 1 through Item 23—which is usually the first 65 pages—is where candidates will find all the relevant information they need in regard to the franchise opportunity. The second section is the actual legal agreement, which can be a bit denser. I tell franchise candidates to mainly focus on the first section and take the time to digest all of the information.”

Each FDD should reflect the brand’s stage of evolution and growth. For example, when the emerging pet services franchise Wag N’ Wash® structured its FDD, the team approached it very differently than an established brand would in order to emphasize the growing state of the company. 

“The document is written to protect the franchisee and the franchisor, but it in no way can fully encompass the depth of the Wag N' Wash franchise partnership,” said Rob Flannagan, President of Wag N' Wash. “We think of it as a marriage agreement—no one builds their marriage off of the legal paperwork, right? There is no way an FDD can predict what is going to happen in a sector, it simply details the guidelines and guard rails to protect the relationship.”

In the past, 1851 has written many articles that can help first-time readers break down each section. While each item is important, some are more essential than others. For example, Items 1 through 4 break down the history of the franchisor, which can reveal red flags such as a failure to pay royalties, trademark infringement or non-compliance.

“As a prospect, don’t let any of the information scare you—use it to your advantage to understand the culture of the company,” said Knuth. “For example, any franchise that has been in business long enough is going to have had some litigation. Do some research before jumping to conclusions. It is a good sign if the company isn’t afraid to talk about things like that.”

Although many franchisors value transparency, it is important to practice discretion when evaluating the information presented in the document. First-time candidates should read through the FDD with a franchise lawyer or a set of more experienced eyes. 

“I work with a franchise attorney based out of Washington, D.C. whose sole focus and expertise is in franchising,” said Denver-based Showhomes franchisee, Patricia Holmes. “She walked me through every clause in the franchise agreement so that I understood what the risks were and what some of the legal phrasings meant. As a new franchisee, this was all gibberish to me, so it was really good to have an attorney translate the legalese, if you will, into more normal language that I could understand.”

When it comes to the bottom line of financial performance representations (Item 19), each franchise’s approach is different. “Item 19 is arguably the most important section of the FDD, however, franchisors are not required to disclose information about potential income or sales,” said Flanagan. “If they do, the law requires they have a reasonable basis for their claims. It is up to candidates to examine this section very closely.”

Flanagan suggests looking for the highs and lows in figures from corporate stores, gross sales, average sales and earnings, as well as noting geographic differences between locations and the number of years the franchise has been in operation.

“Although the FDD may be overwhelming, it gives candidates a great chance to truly understand the business and the values of the franchisor,” said Knuth. “If a franchise candidate doesn’t feel passionate about the concept or the guidelines, FDDs are an indication that maybe the opportunity isn’t right.”

Now, with this general understanding of the FDD, candidates should be better equipped to crack open the document and start the process of determining whether the franchise is a match.

*This brand is a paid partner of 1851 Franchise. For more information on paid partnerships please click here.