What’s an FDD? The Franchise Disclosure Document, Explained
FDD stands for franchise disclosure document. It’s a legal document that every franchisor is by the Federal Trade Commission (FTC) to provide to prospective franchisees as part of the pre-sale due diligence process. Its primary aim? To offer transparency. The FDD provides in-depth details about the franchise system, its history, executives, financial performance, and much more. This ensures you have all the information you need to make an informed decision before investing your hard-earned money.
Get all your questions answered about the FDD below.
The Different Sections and How to Interpret Them
The FDD isn’t a quick read. It’s divided into 23 sections, each labeled as an “Item.” Let’s walk through the most pivotal ones to help you interpret the treasure trove of information they contain:
- Item 1: Franchisor, predecessors, and affiliates. This section provides a snapshot of the company’s history and its key players. Look for any significant shifts in management or any red flags in the company’s past.
- Item 5: Initial fees. Here, you’ll find details about the fees you’re required to pay upfront. Ensure they’re in line with industry standards.
- Item 7: Estimated initial investment. Beyond just the initial fees, this section breaks down all the franchise investment costs involved in the initial investment, such as equipment, inventory, and rent. Use this breakdown to craft a realistic budget.
- Item 19: Financial performance representations. Possibly the most scrutinized section, it provides data on how well the franchise units perform financially. By law, franchisors are not required to include this — but if they do, pay attention!
- Item 20: Outlets and franchisee information. This offers insight into the growth and stability of the franchise. Are units opening or closing? What’s the turnover rate?
The Most Important Parts to Review
While learning the basics of just what is an FDD, note that some parts warrant special attention:
- Financial performance representations (Item 19): It’s the closest thing to a crystal ball you’ll get, revealing earnings as reported by franchisees in operation during the most recent fiscal year. If this section is absent, consider it a sign to probe deeper in your due diligence.
- Franchisee contact information (Item 20): Speaking to current and former franchisees can offer invaluable insights. They can share their experiences, challenges, and advice from their own personal experience.
- Litigation history (Item 3): If the franchisor has a history of frequent lawsuits, especially with its franchisees, it could be a sign of potential conflicts.
- Franchisor’s financial statements (Item 21): Experienced franchisors are required to release audited financial statements for the past three years. This helps you assess the franchisor’s financial health. If they’re not in good shape, they might not be able to support their franchisees adequately.
How to Get Your Hands on a Franchise’s FDD
As mentioned,, franchisors are legally obligated to provide you with their FDD. Typically, you’ll receive it during the discovery process or upon expressing serious interest in their franchise opportunity. If you’re attending franchise expos, some franchisors might have copies on hand. Remember, always ask for the most recent version, as FDDs are updated annually.
Understanding the FDD is an essential step in your franchising journey. While it might seem daunting at first, breaking it down section by section and focusing on the most critical items will make the process more manageable. Armed with this knowledge, you’re one step closer to becoming a confident and informed franchise investor.
American Family Care’sFDD provides comprehensive information for prospective franchisees, and we are here to answer any questions you may have. The franchisor/franchisee relationship is of the utmost importance to us, so we approach everything with transparency and mutual respect in order to lay the foundation for building a successful business relationship.
If you’d like to learn more about franchising opportunities with AFC, get started.