Tip Tuesday – What to look for in a FDD

Before you sign an agreement with a franchise company the Federal Trade Commission mandates that they send you a Franchise Disclosure Document (FDD). This is an in-depth document that outlines everything you need to know about the franchise company and your future potential business. Here are some things to make note of when you review a Franchise Disclosure Document:

• Make note if a trademark is not registered
• Lack of litigation’s filed by franchisee’s claiming fraud or misrepresentation on the part of the franchisor is a good thing
• Understand that the item 19 (earnings claims) may only represent a certain percentage of the franchise system and can contain corporate owned locations
• Take caution if a franchisor is getting major rebates from suppliers that franchisees are obligated to buy from
• Understand and beware of terminology such as “at our discretion”  or flexible statements that allow the franchisor to change the agreement for any reason
• Clarify territory promises and the duration of them. Many times territory protection is only for the life of the agreement and has to be re-negotiated when you renew.
• Lack of a large number of closures of units is a good thing
• Beware of franchisors that cannot sustain themselves from royalties and need to rely heavily on new franchise sales