Wait, It's How Many Pages?! How to Read a Franchise Disclosure Document for the First Time

For those who are researching and considering becoming a franchise owner for the first time, the exploration and discovery process can be like drinking from a firehose. With so much vital information to digest and an incredibly important business decision to make, absorbing and actually understanding all the information given to you, especially in a Franchise Disclosure Document (FDD), can be extremely overwhelming.

But the good news is that candidates are never left to decode and decipher a brand’s 200-something-page FDD alone. They can, and always should, hire a franchise attorney to help them read over it, according to Steve Beagelman, founder of SMB Franchise Advisors*.

Enlist the Help of a Franchise Attorney

“When you're looking at a franchise disclosure document, it’s highly recommended you go to a franchise attorney to have them review it and explain all the details to you,” Beagelman explained.

The cost to hire an attorney to review an FDD with you varies but can be around $300 to $450 per hour, depending on the lawyer and concept being explored. But having an informed second set of eyes is well worth the price; it’s an added layer of assurance for your decision. 

“If you're not familiar with franchising, there will be some things you just won't understand. The franchise attorney will understand the obligations and how the franchisee/franchisor relationship works and really be able to educate you,” Beagelman added.

Pay Attention to Specific Sections

While it’s important to go over every inch of an FDD and to read all 23 sections, also called Items, certain parts of the document are especially important for franchise candidates to read over and grasp. 

Beagleman advised paying close attention to Items 5, 6 and 7, saying, “These startup costs and the fees are very, very important to understand from an investment standpoint.”
 

• Item 5 - This section includes the disclosure of fees that are made to the franchise upfront and during the pre-opening phase of the business. It’s important to pay attention to these numbers because this is the amount that will come out of pocket before the doors are open and any revenue is coming in. Item 5 includes things like the initial franchise fee, real estate-related costs and more. 
  
   
• Item 6 - Item 6 details the fees that will be required to be paid to the franchisor on an ongoing basis once the business is up and running. This includes royalties, advertising spending dollars, renewal fees, transfer fees and more. 

Bryan Lewis, founder and owner of Press Waffle Co., warned to pay close attention to royalty structures.  

“When reading the FDD, make sure to take a look at the risk they are taking on you as a franchisee of a younger brand. They should be giving you everything you need to be successful,” he said. “As an emerging brand, Press Waffle Co. has created a tiered royalty structure: if a store is doing above or below a certain amount of revenue, we adjust the royalty percentage to take a lower or higher cut. That shows we are a very franchisee-focused brand – a trait you want to see in an FDD.” 
 

• Item 7 - This section is dedicated to listing out the total investment franchisees will have to make in order to get the business off the ground. These expenses include those listed in Item 5, along with the costs of equipment, construction, buying or renting property, signage, inventory and more. The brand will outline estimates on both the lower and higher ends of the scale.
   
• Item 8 - Called “Restrictions on Sources of Products and Services”, this Item is where franchisors must disclose their terms and conditions on supplies. Some brands will require that owners buy supplies from the franchise, and if that’s the case, they must disclose how much the brand makes from those purchase obligations.

Lewis said to be wary of brands that limit vendor partnerships and completely control products.

“One of the biggest red flags in an FDD for me is franchise programs that require you to purchase paper goods, all food, all material from them,” he said. “We really believe that franchisees should have the power to make their own decisions, be able to price compare and shop, within certain guidelines, of course. Franchisors shouldn’t be trying to make money on core aspects of the business, and if they need to, the rest of the program is called into question. They should be able to make the money based on your success and the royalties that come off of that.”

• Item 19 - The Item 19 section of an FDD is the brand’s financial performance representation, which gives an idea about the typical revenue that existing units in the business are generating. While this is not a required disclosure, and not all brands include it, most do, as it gives an honest look into opportunity numbers. 

Beagleman warns to take the numbers with a grain of salt because there is “no guarantee that you'll achieve those, that it gives you a good idea on what you may be able to achieve revenue-wise.” He also recommends speaking with an accountant to truly understand the figures and what that means for your business projections and goals.