How to make Sense of the Disclosure Document

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Becoming a franchisee isn’t like starting a business in your garage. For one thing, you don’t have to invent everything as you go along; when signing up with many franchisors, you buy a complete business system invented by someone else – for example, McDonald’s method of flipping burgers. For another, assuming you sign on with a well-known franchisor, you don’t have to worry about whether people will buy your product or service.

On the other hand, you do have to make sense of the disclosure document, otherwise known as the FDD, or uniform franchise disclosure document – a crucial step in becoming a franchisee, and easier said than done. Here’s what I tell my clients to look for in studying the FDD:

The franchisor and its predecessors and affiliates. This section details where the franchisor does business, what product or service it sells, what experience it has, and what kinds of litigation or regulatory actions it faces.
Investment costs and financing. Several sections tell you what franchise fee you must pay to sign on, how much capital the typical franchisee needs to get up and running, what financial assistance the franchisor offers, and what ongoing costs you will face for royalties and fees for advertising, marketing, and the like.
Restrictions on sources of products or services. This section tells you whether you must buy supplies and services from specific providers – for example, the franchisor and its affiliated companies.
Franchisee obligations. This section summarizes your obligations to the franchisor and tells you where to find details elsewhere in the offering.
Franchisor obligations. This section tells you what assistance you can get from the franchisor in launching and running your outlet, hiring and training employees, and so on.
Lists of Current and Terminated Franchisees. These lists provide you with contact information that is invaluable. Make contact with as many franchisees and ex-franchisees as possible to get the real story about life in the system.

The FDD must also contain the franchisor’s most recent financial statements and cover such matters as territorial and trademark rights, renewals, terminations, and transfers, among other important matters.

All in all, the typical FDD can run to 50 pages, often more, and it’s not exactly bed-time reading material. But don’t be intimidated. You need to know what to expect from life as a franchisee, and the FDD gets you off to a good start.

Stay tuned. I’ll discuss the elements of the FDD in greater detail in future articles.