A Guide to Franchise Disclosure Documents

Investing in a franchise is exciting, but this path to business ownership comes with important legal and financial considerations. One of the most important documents you’ll encounter in this process is the Franchise Disclosure Document (FDD).

Before you spend any money to examine a franchise offering, be sure to get a copy of the franchisor’s FDD.

This legally required document provides insights into a franchise’s operations, fees, obligations, and potential risks. However, with more than 20 sections covering everything from litigation history to financial performance, reading through this document can quickly become overwhelming.

This guide from the Franchise Team at PBMares breaks down why the FDD matters, key areas to focus on, and how to use the FDD to make informed franchise decisions.

Key Takeaways:

What Is a Franchise Disclosure Document?
5 Reasons to Spend Time Understanding the Franchise Disclosure Document
Essential Answers You’ll Find in the Franchise Disclosure Document

What Is a Franchise Disclosure Document?

The Franchise Disclosure Document (FDD) contains vetted information for those considering purchasing a particular franchise. The information in the FDD pertains to the franchisor, the individuals and entities associated with the franchisor, fees charged by the franchisor, the franchisor-franchisee relationship, etc.

The Federal Trade Commission requires all franchise companies to provide a FDD to prospective buyers. The FDD is organized in a standard format so prospective buyers can easily compare information for various franchise opportunities.

The FDD protects potential buyers from being misled and protects the franchisor from being accused of providing misleading information.

It’s important to note that the franchisor is sometimes required to attach additional information to the FDD, depending on the state in which the franchise will operate. That additional information can include a copy of the franchise agreement, audited financial statements, and other information.

5 Reasons to Spend Time Understanding the Franchise Disclosure Document

With more than 20 sections in the FDD, reading through this document can feel like trying to make sense of a company’s annual report. But taking the time to understand the FDD is worth it.

Wondering why? Here are 5 reasons:

You’re getting access to legally required information about the franchisor and the franchise system. From franchise costs and obligations to earning claims, territorial rights and litigation history, you’ll have a much deeper understanding of what you’re getting yourself into after reading through this comprehensive business overview.
The FDD helps mitigate your risk. Before making any sort of commitment, reading through the FDD helps uncover red flags like bankruptcies you may not otherwise have known about.
If you’re narrowing down options, the FDD makes it easy to compare those options. Because the FTC requires the FDD to be presented in a standardized way, prospective franchisees can easily compare characteristics like how much support the franchisor provides for training, marketing, etc.
The FDD will help you make an informed choice that builds a strong foundation for your franchise experience from the start. The FDD includes detailed analyses and projections, so prospective buyers can conduct the proper amount of due diligence and financial planning to ensure the investment makes sense for the long term.
A solid understanding of the FDD helps get the franchisor-franchisee relationship off on the right foot. Because the FDD helps calibrate expectations about the level of help they will receive, surprises, conflicts, and misunderstanding are minimized which makes for a more productive relationship between the franchisor and the franchisee up front and down the road.

Essential Answers You’ll Find in the Franchise Disclosure Document

The FDD is a comprehensive resource that will answer your most critical questions and help you make an informed decision. Here is an index to locate answers to your most pressing questions within the FDD:

The history of the franchise: items 1-4
Fees and costs: item 5-7
Support I can expect from the franchisor: items 8, 11, 14
My obligations as a franchisee: items 8, 9, 15
Protected territory: item 12
Dispute resolution and exit strategies: item 17
Financial performance representations and expectations: item 19*

* Item 19 is often the most important section for a potential investor to review before investing in a franchise as it discloses the historical and projected financial performance of the franchise network.

Learn More

Navigating the complexities of a Franchise Disclosure Document can be overwhelming for new franchisees. Whether you’re squeezed for time, unfamiliar with common red flags, or simply unsure about how to interpret such a comprehensive and important document, we can help.

Let the franchise team at PBMares provide expert guidance by reviewing financial statements, assessing fee structures, evaluating earnings claims, and ensuring compliance with franchise regulations, so you can make informed decisions and avoid costly mistakes.

With many years of experience serving franchises in various industries, the Franchise Team at PBMares offers comprehensive accounting, management, and business advisory services that can change the trajectory for your business.