The Benefits of Having a Transparent FDD

When it comes to a franchise disclosure document (FDD), how much information is too much?

On the flip side, when is it just not enough?

There are debates as to how much information should be included in an FDD. In an October 2019 post for Forbes, for example, Wayback Burgers Executive Vice President Bill Chemero wrote about the benefits of excluding Item 19 information and noted that, while an FDD is required by law, Item 19 information is not.

“If you are interested in buying a franchise, you want to see Item 19. If you are selling a franchise, you may be worried that’s all they’ll see. Item 19 can clarify or muddy the big picture,” Chemero wrote.

There are many benefits to having a transparent FDD, says Ricky Richardson, CEO of Eggs Up Grill, a 40-plus location restaurant franchise home to the whole neighborhood, serving smiles from sunup through lunch. 

The way Richardson sees it, there are many benefits to having a transparent FDD. One reason is to respect the fact that prospective franchisees are taking a huge financial risk when they decide to franchise with a brand. Brands should want to instill confidence in their new franchisees. 

“I think it’s incredibly important to have transparency through the brand information that we share with prospects that are looking at Eggs Up Grill as a potential investment,” Richardson said. “So many of our franchise partners are putting all the chips in the middle of the table. They’re banking on the fact and committing themselves to a professional change, to the lifestyle change, as they join Eggs Up Grill. Given the significance of that decision we want to make sure that our franchise prospects and soon-to-be franchise partners have all the information they need to build a really coherent business plan.”

Transparency also extends to connecting prospective franchisees with existing franchise partners, who can also be very open in sharing with prospects the other financial components of a robust business plan, he said. 

“At the heart of all this transparency is making sure that prospects can build a business plan with confidence and clarity that matches up with their excitement and energy around the brand opportunity that Eggs Up Grill presents,” he said. 

In order to be as transparent as possible, franchisors need to first make sure they have a solid financial reporting process in place, he said.

“The first thing is to make sure that you’ve got a robust reporting process with your existing franchisees,” Richardson said. 

Eggs Up Grill franchise partners report their total financial results on a monthly basis. 

“That gives us the opportunity as the franchisor to consolidate those results and get a real sense of the performance of the Eggs Up Grill business model,” Richardson said. 

Once a brand has a robust reporting process in place, the franchisor can give insight into other key areas of financial performance, Richardson noted. This includes food costs, team member labor costs and other operating costs and more that can be disclosed in the FDD. 

Franchisees should also gain the insight needed to build an investment model and know what it’s going to take to get their franchise up and running from an investment standpoint. The FDD helps by setting financial expectations. From there, the prospective franchisee can sit back and think not just about whether they want the brand, but also whether the franchise opportunity is the right financial decision for them and whether it will give them the financial outcomes they seek. 

In addition to financial performance, when a prospective franchisee reads the FDD, they should have a really clear understanding of what is expected of them, what they can expect out of the franchisor in terms of support and materials and processes provided.The franchisee should also know what they will need to execute in order to meet brand standards, as well as the financial and reporting obligations. 

“They should understand what the role of a franchisor is and what the role of a franchisee of the system is,” Richardson said. He added that the FDD will describe the responsibilities and obligations of the franchisor and the franchisee. 

Richardson’s advice for emerging franchise brands as they create their FDDs is to put the “diligence in place to understand what are the roles that you want to provide as a franchisor. What are the levels of services that you think it will take to help new franchise partners be successful?

“If I am pursuing a brand that is very transparent and sharing a lot of information, I’m going to have a much higher level of trust and confidence in that brand than if I’m looking at a brand or interested in a brand and it’s very hard to get information. That’s going to create a barrier for successful franchise development. So, clarity and transparency and access to information is an expectation that we’re finding franchise prospects have now compared to years past.”

When a franchise brand provides transparency in an FDD, not only are they giving the prospective franchisee valuable financial information, but they are also setting expectations clearly from the get-go. By being on the same page from day one, everyone can be set up for long-term success.