The Franchise Disclosure Document (FDD) contains data about the franchisor, the franchise system, and the terms of the franchise agreement. The franchisor must provide this legal document to potential franchisees, who must read it back and forth — it is recommended that a potential franchisee have a franchise attorney review it.
The FDD assists potential franchisees in making sound choices about franchise investment. As a result, all items in the FDD are required. That being said, here is the list of the FDD sections that can make or break your ability to lease your desired real estate space.
This part includes details about the franchisor’s key executives, such as their business experience and any prior bankruptcy or litigation. Most landlords will request information not only about your background but also about the franchisors. So make sure the franchise you buy has a compelling backstory.
In addition, request to see the franchisor’s marketing materials for landlords. These materials should include the company’s success stories, information on the brand’s current state, and information on the brand’s growth plans.
The following additional information should be included:
- Details about existing locations.
- Images of existing locations in high resolution.
- Product or food photography of high quality
Item 7: Calculate the initial investment
Item 7 discusses the franchisor’s estimate of your initial investment. This item is important to a landlord because they want to know how much money you plan to spend on your build-out. When you share that figure, the landlord will demand proof of funds.
If you are using money from your savings, your bank account statements will serve as proof of funds. If the funds are from a loan, you must present a pre-approval letter from your bank.
This section describes the territory in which the franchisee will be permitted to operate the franchise. Some franchisees are territorial, while others are not. Having a defined territory is advantageous because it provides you with protection and the ability to open where others cannot.
It can be advantageous if you do not have a defined territory because you have a larger pool of real estate to search for your location. However, this frequently means that you will be competing with other franchisees for the same sites.
Item 17: Initial franchise term, renewal, termination, transfer, and resolution of disputes.
Item 17 contains many important elements, but I will concentrate on franchise length and renewal. You must pay close attention to the length of your initial franchise to ensure that your lease corresponds to the time you have confirmed rights to the franchise. Signing a lease for a period of time longer than you control the franchise is risky. Remember to factor in your initial franchise period when calculating your total investment costs. For example, if your total build-out costs are $750,000 and the franchise only grants you rights for five years, buying the franchise may not be a good investment. You should also ensure that you have franchise renewal options.
This section is optional, which means that franchisors are not required to include financial performance data in the FDD. If a franchisor chooses to provide financial performance information, they must adhere to strict guidelines established by the Federal Trade Commission (FTC).
Item 19’s purpose is to assist potential franchisees in weighing the financial benefits and risks of investing in the franchise system.
Assume a franchisor decides to include financial performance data in Item 19.
In that case, it must provide specific information about its franchisees’ performance, such as average or median sales figures, expenses, profits, or other financial metrics.
It should be noted that the financial performance data provided under Item 19 must be based on actual data from the franchisor’s franchisees.
The franchisor must also explain how the data was gathered as well as any assumptions or limitations that may apply to the data.
When purchasing a franchise, keep in mind that you must sell the franchise concept to potential landlords once you have purchased the franchise. Most landlords consider a use for their center just as much as they consider the deal. As a result, if your franchise has a use that landlords dislike, or if it is a brand that is actively closing stores, it may be difficult to secure a real estate location of your choice.
Source: Entrepreneur
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