Whether you are a first-time franchisee or are about to embark on another franchise location, it is extremely important to pay close attention to every component of the process. That way you can stay on top of certain requirements or criteria that are necessary for you to meet before officially becoming a franchise owner.
One of the most integral parts of this process is the Franchise Disclosure Document (FDD) that you will receive from the franchisor, as it holds significant material that you as a franchisee need to know about the agreement you are about to enter. An FDD can be quite heavy with important information, so a great way to approach it is by already knowing what to look out for. This article will outline several components of an FDD to keep in mind as you are reading it and provide some background information on them, so you are well informed before you sign on the dotted line.
What is a Franchise Disclosure Document (FDD)?
As previously mentioned, an FDD is provided by the franchisor and given to the franchisee as a legal document, which is enforced by the Federal Trade Commission (FTC). The document will usually include 23 distinct sections and will include information about the roles you and the franchisor hold in the business agreement, in addition to providing the chance for the franchisee to look at how the investment will work – the “game plan,” if you will.
The FTC Franchise Rule, which is issued by the FTC, outlines that the FDD is to be given at least 14 days before the prospective franchisee signs a binding agreement or makes any type of payment to the franchisor – this provides some leeway to make an informed decision.
Now that we understand who issues the FDD, let’s review the various sections that you should look out for once it is in your hands (or on your screen).
The Cover Page & The Table of Contents
This may seem obvious, seeing as how these two sections are in the first couple of pages of the FDD, but the cover page and table of contents are not to be missed. The cover page offers basic information like the franchisor’s contact info (i.e., email address and website) but it also often provides a sample of the primary business trademark that you as a franchisee will use once the agreement is approved, as well as an additional description of the franchised business you are entering.
One of the very first pieces of information on the cover letter is an overview of the fees and investments that have been issued by the franchisor. Although it will not go into immense detail, this section of the cover letter provides a reference to the initial fees and total investment disclosure. You will find that it clearly displays how much it will initially cost to enter this business agreement as a franchise owner, and having that information right away allows you to fully understand what you are entering.
The cover page also includes an issuance date, which outlined by the FTC Franchise Rule Guide is, “any date upon which the franchisor finalizes that version of the disclosure document for future use.” Some states will require franchisors to register their FDD, in which case the issuance date will change to “effective date” and that will display a date that the state approves the registration of the FDD. Remaining aware of this date will give you the chance to ensure that everything on your end is sent at a reasonable time from the issuance date.
The table of contents is also another section to look out for, as the franchisor will have outlined each disclosure item, and it will list any exhibits within the FDD separated by letter. That way you can easily navigate what belongs to which item and the page it is on. With such a long document, having the table of contents readily available will offer some clarity and navigation to what you are about to read.
The Franchisor, Business Experience, Litigation and Bankruptcy
The first four items within the FDD outline who the franchisor is and any background information including any parents, predecessors, and affiliates, if applicable (Item 1); the past five years of experience related to the founder, the management team, directors, principal officers, or any other individuals related to the franchise, as well as the operational history of the business (Item 2); the disclosure of any lawsuits that the franchisor was involved in, including that of the predecessors, parents, and affiliates, as well as if any of the individuals outlined in Item 2 were or are currently involved in a lawsuit within the last 10 years (Item 3); and if the franchise itself or its affiliates, predecessors or its parents have undergone bankruptcy.
When reading these sections, the goal is to fully understand who the franchisor is and who it is affiliated with, if applicable; that way you completely understand what you are entering. You are likely not going to find this type of detailed history anywhere else, which is why the franchisor provides this information to you within these sections as clearly as possible, to ensure you are making an informed choice.
Initial Fees and Other Fees
Although you may have an idea of how much the franchise costs before receiving the FDD, the document discloses more details regarding what the initial fees are, if they are to be made in installments, what the fee is for the franchise itself, and any ongoing or recurring fees, such as royalty, marketing/advertising fees, renewal fees, transfer fees, etc.
Besides receiving this important information related to the fees required of you, franchisors must also list in these sections what each type of fee is, the amount, the due date, if a fee can be refundable or not, whether the fee is collected by the franchisor, and the maximum amount any given fee can increase, amongst other important components. This is almost like a “calendar overview” for your fees, and it will help you prepare for what needs to be paid right away and what you can expect to pay going forward.
Obligations as a Franchisee
Within the FDD, it is a good idea to be aware of what is required of you so there is no confusion in the future. Usually outlined in Item 9, the FDD will disclose your principal obligations as well as where in the document you will find sections for more information related to these obligations. Often in a chart format, it is important to highlight what these obligations are, and there is usually quite a number of them, so it is vital to go to the appropriate section of the FDD to uncover more details.
Just before this section, you will find the restrictions on sources of products and services (usually outlined in Item 8). Here, the franchisor outlines who the required and approved suppliers are that you must purchase from, any required purchases you must make (including if there are standards on delivery, design, etc.), the approval of any alternative suppliers, the revenue you can receive from purchasing, any negotiated prices that the franchisor makes, and other key pieces of information.
Ongoing Franchisor Assistance
This section, usually Item 11, discloses how the franchisor will provide pre-opening assistance, in addition to any ongoing support, which can include advertising and training, in addition to any computer or software requirements to purchase, as well as electronic cash registers or other hardware components at your franchise location.
It is important to be aware of this section because it provides some information on what will come next after you sign the FDD. It will also provide detailed information on how the franchise typically runs and how that will translate over to your location. Accordingly, Item 16 also provides information on any restrictions to what you may sell as a franchisee, and this provides even more information as to how your location will run.
Owning a Franchise with Dogtopia
If you are interested in joining our franchise family at Dogtopia, please check out our page on what a franchise opportunity with Dogtopia can entail, and fill out our online form if you think you are a good fit.