What You WON’T Find in a Franchise Disclosure Document

A brand’s Franchise Disclosure Document, or FDD, provides hundreds of pages of details regarding nearly every facet of the operation, and yet, it won’t tell you everything there is to know about a brand. There are other, essential factors not included in the document that every prospective franchisee should weigh.

Jack Armstrong, the New Jersey market president of FranNet, advises franchisee candidates to ask the company to go above and beyond the legal requirements of an FDD. After all, it’s your money, Armstong says, and if a franchisor has nothing to hide, it should be more than willing to assuage any concerns with a little extra info. 

Ask For More Data

For example, while the FDD requires the franchisor to estimate the level of working capital franchisee candidates need for the first three months, but feel free to ask for more than that. 

“Working capital is basically the revenue coming in versus the expenses,” said Armstrong. “When you open a new business, you’re probably losing money for the first three to six months, sometimes up to a year. The FDD gives the first three months worth as an estimate, but if losses continue past three months, you’ll need more working capital.”

For a franchisee who puts their entire life savings into entering a franchise, the prospect of needing an additional injection of cash in just three or six months could make the entire enterprise untenable. 

For that reason, Armstrong recommends figuring out not just the first three months of working capital, but how much working capital the business needs until it reaches the break-even point, which could be a year away. 

Additionally, dig into Item 19 of the FDD. 

How To Read Item 19

“I think you need a better disclosure and itemized fees,” said Armstrong. “Tech fees, marketing fees, anything that’s going to come at you is going to be disclosed in detail in item 19, but make sure you get an itemized list.”

Finally, beware of broad averages and median figures. A franchise may say their average franchisee brings in $500,000 annually, but upon closer inspection franchisee candidates may find that only one region is making $1,000,000 a year while the rest of the franchisees are scraping by on $200,000. 

Armstrong advises candidates to look at a brand’s top earners and make sure they’re not corporate stores. 

“Some FDDS are putting earnings claims without royalties because they’re showing corporate-owned units, but you’d be paying that royalties as a franchisee, so look out for that,” he said. 

Ask The Franchisees

A good franchise should make other franchisees available during the signing process. Talk to as many other franchisees as possible. Prospective franchisees can directly ask them what the FDD didn’t prepare them for and find out how they feel the advertised numbers match with the real ones. Franchisee candidates should look to talk to existing franchisees in their region or in comparable markets, if possible.

Importantly, franchisee candidates should never feel like they’re asking too many questions. Buying a franchise represents a huge life decision and should be treated as such. By asking questions, and even kicking the tires a bit on a nearby franchise, candidates show the franchisor that they’re diligent and mean business.