Franchise Disclosure Document (FDD) – Yes, you must read it!
Let’s take a quick stop to realize what the Franchise Disclosure Document is and why it exists. We also have a related article on What is a Franchise.
The US Federal Trade Commission (FTC) www.ftc.gov , requires that most sellers of franchises give to perspective franchisees this long FDD Franchise Disclosure Document. This is done to provide you a source of information before you pay big bucks for a franchise operation.
The purpose is to protect you the buyer from buying a business franchise with out full disclosure of who you are dealing with and some of their history with their existing franchisees. It is required to be in your hands a set number of days before you can sign a franchise agreement.
Your Business Mentor Ray wants you to think long and hard before signing any franchise agreement. These contracts bind you in many ways that are not readily apparent to you due to the rapidly changing business environment we all operate in now. What seems to make sense today – may be crazy 5 years from now.
Contrary to what many Franchise Companies want you to think their franchise agreements are negotiable in several areas. You must use an experienced franchise lawyer to review all these documents and then to help you to negotiate the relevant points.
Some ideas involve; the size of your protected territory, terms and conditions surrounding defaults by you, conditions for selling your business to a new owner, productivity goals and royalty payment timing, and what happens in the case of an early termination by the franchiser.
When buying a franchise here a 6 steps to take:
- Contact – Call many existing Franchisees – have a thorough questionnaire ready to ask
- Due Diligence – Deeply review all that you can about the franchise company
- Due Diligence – Does the actual business model work profitably after paying the franchise fees and royalties.
- Consult a Franchise Attorney – the FDD Franchise Disclosure Document and the Franchise Agreement are the basis of your legal relationship with the franchise company. Nothing else said or alluded to matters.
- Negotiate – Yes drive them nuts until you are satisfied that deal makes sense to you.
- Assess whether the cost of the franchise fee and the on-going royalties make financial sense vs. buying an existing business or doing a new business start up.
I am not an attorney and recommend you get an experienced franchise lawyer. But … I have purchased and operated many different franchises in the last 20 years. Many times I have regretted not doing more due diligence or making a hasty decision. Your new small business can happen without the costs associated with a franchise.
As an entrepreneur you need to treasure your capital and financial resources – in business cash and cash flow are your life blood.