Tips for Reading an FDD: Franchisees Share Best Practices

Orhan Veli, who owns and operates six Saladworks restaurants in southern New Jersey, knows a thing or two about the importance of reading a franchise disclosure document. He didn’t have the means to hire a franchise attorney when he first decided to get into the franchise game with a different brand, so he knew he’d need to rely on his own hunger for knowledge and the business advice of trusted family members and friends.

“Paying an attorney was just out of the question,” Veli said, adding that he consulted with anybody whose opinion would prove helpful and relevant. “That was some family members who had some touch for business or signing legal contracts. It was friends. It was franchisees. It was people through friends that I thought, ‘Okay, they have had some experience that might be relevant.’”

Le Macaron French Pastries franchisee Luke Freshwater, whose mobile kiosk franchise is based in Pittsburgh, Pennsylvania, also didn’t consult a franchise attorney during his franchise search process. Without that expert insight, the two were left to fend for themselves in parsing the dense document. Here’s what they learned during the FDD review process.

Make the time to read the FDD

Veli encourages prospective franchisees, whether or not they hire a franchise attorney for assistance, to make sure they take the time to understand the FDD themselves.   

“Really sit down and read it,” Veli said. He added that while an FDD is “usually boring and filled with a lot of stuff that you might not even need,” reading the FDD will still provide a good understanding of the franchise opportunity. Once you go through this process at least once and learn about what to look for, he said, the FDD review process becomes much easier.

Now when it’s time to review an FDD, Veli is a pro, but understanding that first FDD on his own wasn’t an easy process. Veli joked that “you’re using a dictionary half of the time.” He persisted, though, and ended up learning a lot.

“The lack of money forced me to do a lot of things myself,” Veli said. “Paying an attorney, even for an hour of their time, was more expensive than what I could allow myself to do. But because I had to go that route, whether it was an FDD or the first lease that I ever signed, I had no choice but to get through it and really understand.”

Freshwater’s experience reviewing an FDD, while different, touched on the same theme: the importance of a thorough review.

“I found it to be challenging to review the FDD and figure out what was most important,” Freshwater said in an email. “The FDD is a large document and can be overwhelming at first. However, once you dig into it, it becomes exciting to learn more about the franchise and business you are looking into. You are able to identify areas of concern and potentially eliminate a franchise as an option for you simply by reviewing the FDD.”

In this process, though lengthy, Freshwater said readers are able to determine a concept’s previous success and future potential, yet must also be aware of any misleading information.

“We live in a world of regulations, so it's important to spend the time learning what is truly important within the document,” he said. “You can feel a little dumb asking so many questions, but it's important to address all of your concerns. No matter how silly they may seem.”

Get all of your concerns addressed

When deciding whether to franchise with Le Macaron, Freshwater’s concerns mainly centered around the number of stores that had shut down in recent years and the costs of opening a location. In both cases, the franchisor was able to help him.

“The franchise was able to give me a more clear picture on what my costs would be after a more detailed discussion,” Freshwater said.

Veli said prospective franchisees should pay attention to litigation and growth when deciding whether to franchise with a brand.

“What I would look for in an FDD if I was going into a new franchise,” Veli said, “Are things like: Is there any litigation? Is there growth or is there negative growth in the concept? Those are things that are always listed in an FDD, but you don’t always get the full picture based on that.”

If a prospective franchisee is looking into reasons for litigation, for example, Veli recommends following up with the franchisor to address those concerns in addition to current franchisees within the system.

“Contact franchisees who have been in the system for a long time, who are veterans, who are full-time store operators,” he said. “The combination of getting the official answer and then doing some due diligence on your own, that’s really the bottom line.”

Freshwater had “several conversations” with Le Macaron’s Franchise Development Manager, eventually deciding it was in his best interest to consult other franchise owners, as well.

“I also reached out to other franchisees across the U.S. in order to ask questions that I had regarding the FDD from a franchisee perspective,” Freshwater said. “This is extremely important in my opinion, and I believe you should talk to a minimum of three to five franchisees.”

Don’t be shy about asking questions

Veli noted that not all answers can be found from the same source, so prospective franchisees should utilize everything at their disposal and leave no stone unturned.

“There’s a lot of homework there and I can’t say that you get your answers from one specific source,” Veli said. “You have to use your head, put your common sense into play and follow your logic to find the answers.”

Bottom line: Read the FDD and seek help when needed.

“If you don’t understand something, take the time to figure out what it means,” Veli said. “Google is an amazing tool.”

He added that it’s really good to gather all of the information one learns about a brand to then compare it to an FDD of another type of concept in the same arena and see how it measures up. Freshwater also stressed the importance of making sure prospective franchisees get the answers they need to make the correct decision for them.

“Ask as many questions as you need to in order to understand what you would be signing up for and be comfortable with your decision,” Freshwater said. “Take your time and don’t let anyone rush you.”