FDDs can be daunting to those exploring franchise opportunities for the first time. Use these tips to successfully navigate FDDs, no matter how dense.
Regardless of your business experience, reading a franchise disclosure document is no easy feat. Made up of 23 sections called ‘Items,’ FDDs provide prospective franchise buyers with a detailed cross-section of the business ownership opportunity they are considering.
Despite their length (these documents can reach upwards of 200 pages) and jargon (why does ‘Item 19’ sound like the key piece of evidence from a crime scene?), FDDs are perhaps the most valuable tool when determining whether or not a franchise opportunity is the right fit.
1851 Franchise consulted franchisees and franchisors to nail down some tips to keep in mind when reading an FDD for the first time.
Take advantage of the structure
“Franchising is so much more structured than normal business purchases,” Gary Smith, a Dream Vacations franchise owner based in Eugene, Oregon, said of his initial takeaway after reading an FDD. “Having bought and sold several [non-franchise] businesses, the disclosures and amount of information provided, among other FDD elements, made this a much different evaluation process than a normal business purchase.”
Part of the reason for this is the specific layout of FDDs mandated by the Federal Trade Commission. On behalf of the prospective franchise buyer, the FTC requires a uniform presentation of the document to aid in the reader’s understanding.
“FDDs are structured by law, so it’s fairly easy to compare them side by side,” said CoreLife Eatery president Scott Davis. “One of the best ways to understand the differences between companies and their intent is to get FDDs from similar concepts to compare against each other.”
Doing so, Davis explained, helps franchise candidates ask better questions during the evaluation process to arrive at a more holistic understanding of how a brand fares in its particular industry.
Note the restrictions a franchise brand has in place
As Smith pointed out, the franchise model maintains a very particular constitution. As such, there are many restrictions and limitations that exist in franchising that warrant consideration in a prospective buyer’s evaluation process. When going through an FDD, franchise candidates should identify the limitations set by a particular brand and make sure they are comfortable operating within those boundaries.
“Unlike my past businesses that I started independently, there were a lot of restrictions on how I could run my franchise business that needed to be factored into my decision,” Smith said. He explained that while he recognized that these restrictions served as the basis for system-wide brand uniformity and understood that the power of a franchise lies with its proven system, an inability to adjust to local conditions or take advantage of market opportunities could be a deterrent for some.
“A true entrepreneur may have some reservations about buying a franchise,” CoreLife Eatery Senior VP of Franchise Development Steven Corp added. “A franchise, by definition, is the ability to operate your own business under the guidelines of the franchisor.”
Approach the document with a critical eye
Despite its breadth, Smith cautioned that FDD readers shouldn’t assume that the document contains all relevant purchase information.
“The hardest part of reading the FDD was trying to figure out what wasn’t included that I needed to know,” he said. “The size and scope of the document can lead you to believe everything you need to know is in the document, but it isn’t always.”
The onus, therefore, falls on the prospective franchise buyer to identify any inconsistencies or areas where more information is needed in order to gain the best view of the entire business opportunity. One area Smith specifically recommended readers take a careful look at and independently verify was the Estimated Initial Investment section, or Item 7.
Overall, Smith advised, “Read with a skeptic’s eye to see what might be missing. If anything seems questionable or isn’t clear, ask your franchisor’s recruitment team to review it with you.”
Contact other franchisees
Franchisor and franchisee agree: the most valuable part of an FDD is the franchisee list contained in Item 20. That internal validation of whether the people currently occupying the very position a prospective franchise buyer is debating whether to take on are satisfied and successful is critical information in the franchise purchasing process.
“[Item 20] allowed me to contact others, ask questions, and gauge my ability to duplicate those who have been successful and avoid the mistakes of those who weren’t meeting their goals,” Smith said. “Use the list of existing units to your advantage. Contact as many as you can with a simple, non-invasive, survey that will help you judge if you are a good fit for this opportunity and if you can be successful enough with the opportunity to achieve your goals.”
“Talk to current and former franchisees about their experiences with the brand,” Davis similarly advised. “Also ask questions, as many as possible.”
While FDDs are undoubtedly complex, franchise candidates will succeed when they ensure that they have reviewed and understood the entire document before making a decision.