When Performing Due Diligence on a Franchiser Review the Franchise Disclosure Document

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The Franchise Disclosure Document (FDD) is one of the most important tools to utilize when assessing a franchise opportunity. nonetheless, it shouldn’t be used exclusively for a franchise assessment. The FDD by itself doesn’t have all the information necessary to make an informed decision on the viability of a franchise’s Business Plan and Marketing Plan; however, if used in conjunction with a good Franchise Checklist, the FDD is certainly a valuable due diligence tool.

The Franchise Disclosure Document has replaced the Federal Trade Commission’s Uniform Franchise Offering Circular (UFOC) and has differences in three key areas.

Information in Tabular Format for easy comparisons between different Franchisers.
Post ’79 changes in the Franchise Business, such as different hardware and software requirements.
Earnings Claims by Franchisers, called Financial Performance Representations, are more informative and valuable to prospective franchisees.

You will find the FDD is organized in a fashion to advantageously compare different franchises. It is uniform and has 23 sections or what I call items. I highly recommend you completely read the entire FDD, making notes in the margins of questions and areas to explore. Certain sections of the FDD should be assigned to your Attorney, Accountant and Business Advisors.

FDD Items #1-4: History

Item 1: Franchiser business history, including predecessors and affiliates. It is the key overview of the franchiser.

Item 2: Background data on key officers, directors and employees, including corporate management. Summarizes their work experience of the past five years, along with experience serving as officers/ directors of other companies. This is key information as it will show how much experience Franchiser Corporate has in the business, which translates often into franchisee success.

Items 3 and 4: Any litigation of bankruptcy issues of the franchiser and its key management.

FDD Items #5-7: Fees and Costs

Item 5: All initial fees charged to begin the business.

Item 6: Other fees charged in subsequent operation, such as royalty, advertising, renewal and transfer fees.

Item 7: Breakdown of every component of the franchisee’s initial investment to include an advertising allowance and operating capital reserves. Provides ranges of potential costs, which you will need to firm up with existing franchisees and through your due diligence research. Determining the most accurate projection of costs for your territory/ location and circumstances is key.

FDD Items #9,11 and 15: Contractual Obligations

Item 9: This section includes the obligations of the franchisee, which includes legal obligations and business responsibilities. Be sure to carefully review this section with your lawyer who specializes in franchises and a good business consultant.

Item 11: Franchisor contractual obligations. This is very important as it outlines what you’ll receive in exchange for the franchise fees charged, including pre-opening and on-going assistance, education programs, franchise systems and advertising programs. This is a good section to review your Franchise and Business Consultants and works well in conjunction with our Suggested Franchise Due Diligence Checklist.

Item 15: Franchise personal obligations and expectations in the franchise operation.

FDD Item #12: Territory

This lists the terms of your protected or exclusive territory if applicative. Read this section very carefully!

FDD Item #17: Exit Strategies and Dispute Resolution

Restrictions on Renewal, Termination or Transfer of the Franchise Agreement.
Dispute resolution methods, including Binding Arbitration.
Should review this section with your Franchise Attorney.

FDD Item #19: Financial Performance

Franchiser’s representation of unit financial performance.
This section will not answer the franchisee’s question about how much money he or she can make. To answer this question, utilize your Due Diligence Checklist, the Marketing Section, to determine what your prospective market will translate into financial projections. Working closely with existing Franchisees in your area will help firm up your projections.
This item will provide you initial clues to apply in determining what your area can produce in terms of prospective franchise profits.
The disclosure contains three types of information:
- Revenue/ Expense Data
- Assumptions used in the Financials
- Disclaimers about the usefulness of the information
- It is important to review the assumptions behind the franchiser’s financials in order to accurately understand, as well as, apply the financial information given. For example, the data may be too dated to be useful for your particular analysis and projections.
It is very important to review this information with your Accountant and utilize the experience of your Franchise and Business Consultants in constructing an accurate financial picture for your particular franchise opportunity.
When speaking with existing franchisees, be sure to verify both the franchiser’s financial data and your own market research and financial projections to determine realistic expectations of market potential and financial results.

FDD Item #20: Existing Unit Data

Information about the number and locations of existing franchises.
This includes information from units that have closed or transferred ownership.
This item is valuable for your market research.

FDD Items #21 and 22: Financial Statements and Contracts

Item 21: The Franchiser’s audited financials for the previous three years. An indication of the Franchiser’s financial strength and stability. Review with your Accountant.

Item 22: Franchisee Contracts, including the Franchise Agreement and other contracts covering personal guarantees, real estate assignments, advertising, co-op rules and conditions, territorial development schedule, etc.

Other Important Rules, Restrictions and Information

Items 8,10,13,14,16,18 and 23

Where you can purchase supplies.
What products and services a franchisee can offer.
Personal participation obligations.
Financing Programs
Public Figures or Celebrities associated with the Franchiser.
Status of trademarks patents and copyrights.
State particular rules, regulations and information.

Be sure to review the FDD with your Business Consultant, Franchise Consultant, Franchise Attorney and Finance Consultant. Objective and experienced advice is critical in determing if this is the right franchise for you.

About The Article Writer ~ Frank Goley ~ Business Consultant

Frank Goley has a diverse background as a business consultant, business turnaround consultant, business plan writer, business plan expert, small business consultant, business coach, business plan consultant, marketing consultant, business planner and online marketing consultant, and seo consultant for ABC Business Consulting. He has been helping companies to succeed for many years. Frank wrote his first business plan over twenty years ago. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies, and project specific business plans. Frank is the author of a business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 50 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success Newsletter.

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