Franchisors share the common mistakes they see and the common questions they receive regarding franchise disclosure documents.
A major step in deciding whether to franchise with a brand is reading the franchise disclosure document. The FDD is a window into the inner workings of a brand and contains tons of relevant information regarding its franchise opportunity.
As such, it's important to have a solid grip on the document before making what is often a monumental life decision for many entrepreneurs. 1851 Franchise caught up with franchisors to learn some of the most common mistakes franchise candidates make when reading an FDD and the most common questions they receive.
Not doing due diligence
Prospective franchisee candidates should make sure they are putting in the time and effort to learn as much as they can about a brand before ever getting to the FDD.
“One common mistake is not doing proper due diligence in exploring the opportunity,” uBreakiFix VP of Franchising Todd Evans said in an email. “Take advantage of all the information at hand and don't be afraid to ask questions if you have them.”
Not understanding the FDD’s core purpose
“The biggest mistake [candidates make] would be not understanding what the FDD is all about,” DrPhoneFix COO Timothy Phelps said. “It’s there to protect the name of the company.”
Regarding his brand’s FDD, Phelps acknowledged there’s a lot of detailed information and prospective franchisees do read the fine print, they just don’t understand it. That understanding is crucial, Phelps said, because the FDD outlines the system franchisees will be expected (and legally obliged) to follow.
“We put eight years into building [DrPhoneFix], and it’s a proven brand and it’s a proven industry,” Phelps said. “If you follow the system, you’ll be successful. If you start making up your own rules and doing your own things without communicating, you’re most likely going to fail, so it’s important that you follow the system.”
Not reading the FDD thoroughly
All of the information contained in an FDD is there for a reason, so prospective franchisees will only benefit from carefully examining it.
“I would just say that [franchise candidates] need to be sure to thoroughly read and understand the document,” Nothing Bundt Cakes Chief Development Officer Chris Bremer said in an email. “Sometimes people make assumptions or extrapolations off of surface-level information, which may not be the best approach.”
Not reviewing the FDD with an attorney
It is of great benefit for prospective franchisees to seek assistance in comprehending the FDD.
“Prospective franchisees should keep in mind that this document covers many aspects of the business and has great information included to help them learn,” Bremer said. “Everyone should seek whatever assistance they feel will help them understand this document fully.”
Getting legal help might also be a good idea, franchisors believe.
“[Franchise candidates] should always have an attorney review [the document with them] before they really get involved,” Phelps said. “You get a 15-day grace period to do this stuff, and I think that’s important so everything is asked up front and resolved from the very beginning.”
This also means devoting the proper amount of time to reviewing the document, they explained.
“It's a large document, and it can be overwhelming, so be sure to give yourself ample time to review it,” Evans said. “We encourage prospective franchisees to seek legal counsel and to have an accounting team review the document along with them.”
Not asking questions
Prospective franchisees should not be afraid to ask questions, Phelps, Bremer and Evans noted. While the most common questions they receive vary based on each concept’s specifics, there are some common threads that run through them all.
Along with getting assistance in the review process, asking questions is of paramount importance for Phelps.
“The biggest things are having somebody else look at the FDD and freely asking questions if you’re concerned about anything,” he said. “Don’t hesitate to ask.”
One of the most common questions Phelps and his team get from prospective franchisees is whether DrPhoneFix has to be an owner-operator business or if they can be an absentee owner.
“That’s one of the biggest questions I get, and what I feel what they need to understand is that every business needs to be run by a good management team,” he said. “If there’s strong support and a good management team in place, any business could be run very successfully. At the end of the day, I don’t think anyone is a silent owner.”
Common questions also revolve around finances, Bremer added.
“Questions mostly center around costs and some of the various items related to business requirements and financial data,” he explained.
Prospective franchisees, of course, are also interested in revenue potential.
“The most common question is ‘How much money can I make?’” Evans said. “The FTC rules allow franchisors to include a financial performance representation (FPR) in Item 19 of the FDD. Whenever we get this question, we tell potential franchisees that our FDD contains an FPR. We also tell them, however, that they should consider the entire FDD and not just item 19 when looking at a franchise opportunity.”
Avoiding making these mistakes gives prospective franchisees a better chance of accurately assessing an FDD to learn whether the franchise opportunity they’re exploring is actually the right fit for them. Doing so, in turn, sets both franchisor and franchisee up for a better, more lucrative long-term relationship.