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A Franchise Disclosure Document (FDD) provides information about the franchisor, the franchise system, and the terms of the franchise agreement. This legal document must be provided to prospective franchisees by the franchisor and read back and forth by prospective franchisees; it is recommended that a prospective franchisee have a review by a franchise attorney.
The FDD helps prospective franchisees make informed franchise investment decisions. Therefore, all items in the FDD are essential. With that being said, here is my list of the sections in the FDD that can make or break the lease of your desired real estate.
Related: 7 things you can’t miss in the FDD
Item 1: Business experience
This section provides information about the franchisor’s key executives, including their business experience and any bankruptcy or court history litigation. Most homeowners will ask you for details not only about your background, but about the franchisors as well. So make sure the franchise you buy has a good history.
Also, ask to see the franchisor’s marketing materials prepared for homeowners. These materials should contain the company’s success stories, details about the current state of the brand, and information about the brand’s growth plans.
Additional information must include the following:
- Details about existing locations.
- High-quality images of existing locations.
- High-quality images of product or food photography.
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Item 7: Estimate the initial investment
Article 7 covers what the franchisor believes your estimated initial investment will be. This article will be relevant for a homeowner, since he wants to know how much money he will spend on building it. Once he shares that number, the landlord will want proof of funds.
If the money comes from your savings, your bank statements will be proof of funds. If the money comes from a loan, you must show at least one pre-approval letter from your bank.
Point 12: Territory
This section provides information on the territory where the franchisee may operate the franchise. Some franchisees are private in the territory, while others are not. Having a defined territory is excellent since you have protection and the right to open up where others cannot.
If you don’t have a defined territory, it can be advantageous since you have a larger pool of real estate to search for your location. However, this often means that you can compete with other franchisees for the same sites.
Related: The 23 Items Your Franchise Disclosure Document Should Include
Item 17: Initial Franchise Term, Renewal, Termination, Transfer, and Dispute Resolution.
Many essential elements can be found in Point 17, but I will focus on the length and renewal of the franchise. With regard to the length of your initial franchise, you should pay close attention to ensure that your lease agreement reflects the time that you have confirmed franchise rights. Signing a lease for longer than you control the franchise will be precarious. Remember that your initial franchise period must be taken into account when taking into account the total investment costs. For example, if your total construction costs are $750,000 and the franchise will only give you the rights for five years, it may not make sense to buy the franchise. You’ll also want to make sure you have renewal options for the franchise and feel comfortable with renewal options.
Related: How Your Business Can Be Its Own Owner
Item 19: Representation of financial performance
This section is optional, which means that franchisors are not required to provide financial performance information in the FDD. However, if a franchisor chooses to provide financial performance information, it must follow specific guidelines set forth by the Federal Trade Commission (FTC).
The purpose of item 19 is to help prospective franchisees assess the potential financial benefits and risks of investing in the franchise system. Suppose a franchisor chooses to include financial performance information in Item 19. In that case, you must provide specific details about the performance of your franchisees, including average or median sales figures, expenses, profits, or other financial metrics. It is important to note that the financial performance information provided in item 19 must be based on actual data from the franchisor’s franchisees. The franchisor must also clearly explain how the data was collected and any assumptions or limitations that may apply to the data.
Related: 23 Questions to Ask a Franchisor When You Meet Face to Face
Because item 19 is optional, it is not included in all FDDs. However, if financial performance information is provided, it can be a valuable tool for prospective franchisees when evaluating the potential return on investment and profitability of the franchise system. Many owners will ask you to provide details about the franchise’s average sales.
These sales help the lessor decide to lease to your franchise brand. As a side note, it’s also important to understand that these sales also help the landlord know what kind of rent he might be able to pay. Therefore, I recommend that you keep this information to yourself, unless you feel it will help the landlord make the decision to choose your brand.
When buying a franchise, remember that once you buy the franchise, you must sell the franchise concept to potential owners. Most homeowners think about a use for their center as much as they consider it in terms of the deal. Therefore, if your franchise has a use that the owners do not favor, or if you are a brand that is actively closing stores, it may be difficult for you to secure a real estate location of your choice.