Partnering with a franchise lawyer, taking your time and asking questions can take the sting out of the dense franchise disclosure document.
Parsing the Franchise Disclosure Document, or FDD, can be a daunting task for prospective franchise owners. The document is pivotal to the continuation and health of the franchisee-franchisor partnership, as it outlines the brand’s history, fees, rules and regulations, unit turnover rates and other important aspects of a particular franchise.
But after having already discussed goals and pain points with their families and friends, assessed their willingness to leave or significantly change their current career, plus taking considerable time validating the franchise opportunity, the prospective franchisee may well be feeling tapped out by the time their discovery process brings them to the FDD.
The good news? There are consistent points in the document to hone in on, plus a community of existing franchisees within a given brand’s system whose experience can be leveraged.
TGA Premier Sports is a franchise that offers three different franchise opportunities to candidates: TGA Premier Golf, TGA Premier Tennis and TGA Premier Team Sports. 1851 Franchise spoke to franchisee Winnie Woody of TGA Premier Golf of Mercer County, New Jersey, and to franchisee Jeremiah Paladino, who operates TGA Premier Tennis of Southern Oregon, to gain insight on what they found to be the most helpful when reviewing FDDs as part of the discovery process.
Neither Woody nor Paladino had any previous familiarity with FDDs, as both were first-time franchise buyers—Paladino even said that before he sat down with one, he “didn't even know what an FDD was.” Luckily, their unfamiliarity didn’t throw Paladino or Woody off their game.
“We did seek the advice of an attorney as a ‘second set of eyes’ on the documents,” Woody said, referring to both herself and her husband, who is also her business partner. “We knew we would be more comfortable for the long-term receiving outside advice. The document seemed both clear and logical to us, but we figured that only good could come from an outside source who had handled similar purchases with clients.
Paladino echoed this experience.
“I read through the FDD [myself], as well as had a lawyer review the FDD,” he said. “He pointed out a few things he thought I should ask in addition to the questions I had found on my own.”
Because FDDs are full of valuable information—the documents are known to reach upward of 200 pages—it’s valuable to read through the whole FDD, but especially the contracts of section 22, with a franchise lawyer.
While they both partnered with a franchise lawyer, Woody and Paladino keyed in on distinct elements of the FDD.
“For us, the issue of ‘accurate reporting’ was important,” Woody said. “Our attorney wanted to make sure there was a reasonable expectation for revenue reporting that allowed for the occasional human error. The information about specific requirements was very helpful to us (such as required vendors, mandatory trainings, etc.), as this prevented any surprises, financial or otherwise, in the months and years that followed.”
For Paladino, the most important parts were “the annual minimum requirements needed to be met by the franchise in order to be in good standing.” Paladino said he wanted to make sure he felt he could “meet and exceed those goals as they came due,” demonstrating an important part of his quantitative due diligence.
For Woody, her experience reading an FDD was a positive one—and one for which she and her husband received ample support.
“Reading the FDD was positive in the sense that it was not exhaustive in length and it was specific,” Woody said. “We did seek support from our personal attorney. We also received thorough and prompt responses to our questions that we posed to our franchise headquarters, and they were available throughout the process.”
Paladino said that, for him, “reading an FDD isn’t necessarily positive or negative; it’s more informational.” As a businessperson, Paladino said, reading through the FDD was an informative experience: “It was interesting to read through the FDD and see how they had structured the contract to benefit both the franchisor and franchisee.”
When asked for advice that they could offer prospective franchisees preparing to parse their first FDD, both Woody and Paladino emphasized close reading, the support of counsel and a willingness to ask questions.
“Advice I would give would be to at least have someone else read it over in addition to yourself so you don't miss anything, preferably someone in the field of law,” Paladino said. Woody emphasized that “any potential investor should seek counsel—even an experienced attorney or business person should seek outside advice, as someone outside the immediate setting will have other questions and suggestions that might be helpful.”
Paladino also recommended keeping a curious and engaged attitude, and not being afraid to reach out to the franchisor with questions.
“Don't be afraid to ask questions; most franchisors want to answer your questions to you know exactly what is in store for you as a franchisee,” Paladino said. ”They don't want you to be surprised by anything either.”
Woody said that prospective franchisees should take their time when moving through the FDD.
“Look at the document from start to finish, then have a solid day or so before you look at it again for the second time,” Woody advised. “It is better to spend a few days or weeks (versus a few hours) to make sure you understand the ramifications of the contract and are going in feeling comfortable about the expectations for both parties.”
Overall, Paladino said, he ultimately found the FDD to be pretty straightforward and appreciated that, as a resource, the FDD standardized the critical dimensions of the brand, business model and franchisee-franchisor partnership.
“A large part of the FDD was pretty standard and simple (once you get past the lawyer language),” Paladino said. “The company is trying to protect its brand and image and make sure [that] whoever is buying the system understands that it needs to be done a certain way in order to uphold the quality of the product.”
Is that level of franchisor oversight a positive?
“This is, of course, a positive for whoever is buying [the franchise] because they know that other owners are motivated to run a good business and that reflects well on everyone's business,” Paladino said. “TGA handled all my questions about the FDD quickly and I felt confident they would provide the same type of ... service for me as an owner. I have not been disappointed."