How to read an FDD – And spot “Red Flags”

How to Read (and Spot Red Flags) in a Franchise Disclosure Document

Author – Brent Dowling, CEO of Raintree Brands.

  • Published on November 29, 2022
  • Comments added, with permission, by Kim Perrotta – WorldWiseFranchise.com

KGP – This article is one of the better informational articles available concerning the Franchise Disclosure Document (FDD) and how to read one confidently.  Brent Dowling is the CEO of Raintree Brands ( https://www.raintreegrowth.com ).  While you may find many sources of information about the FDD and how to interpret one I found this article to provide clarity, spot-on commentary, and the experience of a CEO that reads some 150 to 200 FDDs per year.  Brent has done an excellent job at establishing the points truly necessary to review an FDD “like a pro.”  I will add, however, as does Brent, that you should never rely on a single source and utilize your own “Franchise Team,” which should include a Franchisee centric attorney and accountant and, if you deem it necessary, someone to assist you with your search and due diligence.  As you read, you’ll find the  salient points that Brent makes and then my additional comments marked KGP.

Full credit for the original article obviously goes to Brent Dowling with my thanks for his allowing me to add some of my own comments to the article that originally appeared on https://LinkedIn.com as follows:

https://bit.ly/3EQhqsp

Brent Dowling

Terrible Surfer || Mediocre Snowboarder || 𝘉𝘦𝘵𝘵𝘦𝘳 𝘢𝘵 𝘮𝘢𝘵𝘤𝘩𝘪𝘯𝘨 𝘨𝘳𝘦𝘢𝘵 𝘍𝘳𝘢𝘯𝘤𝘩𝘪𝘴𝘦𝘦𝘴 𝘵𝘰 𝘨𝘳𝘦𝘢𝘵 𝘍𝘳𝘢𝘯𝘤𝘩𝘪𝘴𝘰𝘳𝘴

For those of you new to the world of franchise investing, fairly early on in the franchise process, franchise hopefuls will receive a document known as the Franchise Disclosure Document (FDD). Franchise disclosure documents are legally mandated by the Federal Trade Commission. Buying a franchise and becoming a successful franchisee requires you to carefully read the FDD for your selected brand and clearly understand its terms before entering into a legal relationship.

Most individuals outside of the legal profession initially view the franchise disclosure document as an overly onerous legal document, as complex as it is confusing, and that’s mostly correct. But as you become acquainted with the document and shed your initial sense of overwhelm, you’ll realize that it’s relatively well structured. Even better, the language is written at a level that can be understood by the average person. You absolutely possess the ability to read and understand its contents.

KGP – For many first-timers, this may still be a challenge. There is a myriad of legal like language in the FDD and the agreement(s) within.

When armed with the knowledge of an insider, you can successfully leverage the information in the franchise disclosure document to gain greater insights into the quality of the franchise brand you’re considering.

What is the Franchise Disclosure Document? And What is The Point of It?

The franchise disclosure document is a document the Federal Trade Commission (FTC) mandates each franchisor to offer each of their respective franchise candidates. At a basic level, the intent of the FDD is to define the legal relationship between the franchisor and franchisees. At a deeper level, the FDD is written to protect the brand (and everyone who has invested in the brand), since a single franchise owner will be entrusted with enough responsibility to potentially harm the brand without the details of that legal relationship being firmly in place.

Here’s the underlying truth that no franchise development representative or brand is likely to tell you directly: since the franchisor is responsible for creating and establishing the terms of the franchise disclosure document, it’s underlying intent will always be to ensure that if a legal dispute arises between the franchisor and a franchisee, the franchisor is slated to win.

KGP – No question, agreements contained within are purely adhesion agreements

I’ve explained this to franchise candidates in the past (and just as directly). Their responses are almost always the same: “Who in their right mind would sign that?!” I try to respond to balking candidates by reminding them: “There’s about 750,000 active franchise agreements as we speak.” (Source – Goldstein Law Firm, and now closer to 800,000.)

If the terms of the franchise disclosure document are so unfair, then why do people keep signing up? In truth, the terms of the franchise relationship set by the franchisor is not necessarily as unfair as it may sound:

The franchisor is responsible for protecting the investments and greater good of the collective franchise system. For all other franchise owners to be able to survive, they must first ensure that no one franchise owner can bring down the entire brand.

But here’s the other truth: if a franchisor is only offering the support and functionality described in the legal doc, it puts the entire brand in jeopardy. For the franchisor to succeed, the vast majority of the franchise owners need to be succeeding, and in order for that to happen, they need to offer robust support functionality and constantly be working on behalf of the franchisor to improve the product and service offerings.

Indeed, the franchise disclosure document offers no real insight into the qualitative side of a franchise. It won’t tell you the full list of franchise support personnel, nor, for example, will it tell you the marketing programs they offer to help franchise owners get customers in the door.

But that’s no reason to gloss over the franchise disclosure document review phase entirely. When you take the time to read and understand the FDD in its entirety, you will gain valuable insights into the quality of the franchisor that you will not find anywhere else.

What is Covered n the 23 Items of a Franchise Disclosure Document?

I read, on average, about 150-200 franchise disclosure documents in any given calendar year, which includes the brands I investigate for personal investments, along with the brands that I consider for representation within the Raintree brand portfolio.

All FDDs share roughly the same format and are made up of 23 items. After years of practice, I can scan them for red flags and promising opportunities fairly quickly.

This table offers basic understanding of the 23 items, which you’ll need in order to appreciate the types of red flags that I look for:

How to Read a Franchise Disclosure Document like a Pro

To read your franchise disclosure document like a pro, you’ll need to understand how the content under each of these items can influence your working relationship with the franchisor.

Here’s how I attack each section:

ITEM 1 (The Franchisor, Its Predecessors and Affiliates)

This first item offers a contextual overview. It provides a short history of the franchisor and a description of their business.

  • Here we need to start to understand “When did the business start?” and “When did it start franchising?”
  • Be wary of a business model that’s only been in existence for a year or two. I’ve found that brands who franchise too quickly may still be testing and developing their model, which ultimately means that their franchisees are not really getting the value of a proven business concept yet are still responsible for paying the franchise fee and ongoing royalties to the brand.
  • In a similar vein, new franchises with just 1 corporate model are high risk. Look to find some evidence of successful replication.

ITEM 2 (Corporate Officers) 

  • Look at the number of executives. If there is just a founder listed, then chances are the brand has not yet built out a solid support team. Oftentimes, a small or non-existent executive team, aside from the founder, means that you will be missing out on value in terms of executive-level support, which is largely what you’re paying for with the franchise fees and royalties.
  • While I don’t see a non-existent or small executive team as ideal, it does make sense under certain circumstances. When the brand is emerging, it doesn’t have as much personnel as a more mature brand, largely by design. The brand will invest in itself and its personnel over time. But early on, a small executive team can work perfectly well, so long as the founder is willing to hold hands with the first group of franchisees and walk them through the founder’s process. In fact, in this situation, I think a smaller team is actually a net plus. This can offer even greater support than a small number of less familiar executives could because the founder will personally coach franchise owners through starting and maintaining their franchise businesses.
  • KGP – It may also mean the franchisor doesn’t have the capital to support a productive infrastructure, suggested you have your accountant review the company financials as well.
  • IMPORTANT: Especially when the franchise brand has exceeded 25 locations or more, when looking at item 2, identify if there is actual franchise experience on the roster. Just because a group of professionals created a highly successful business, doesn’t mean they know how to create a highly successful franchise system. A business and a franchise system are two completely different animals.

ITEM 3 (Litigation)

  • This section contains the brand’s dirty laundry, so franchisors want this section to be as short as possible. A long list of disputes here is a definite red flag; it more than likely suggests a broken business model or a franchisor that lacks the ability to work through conflicts in a constructive and healthy manner.
  • KGP – Limited to the disclosure of only the last ten years at the time of FDD submission.
  • Litigation issues do happen from time to time, regardless of how strong and profitable a brand may be. It’s important to distinguish between litigation issues that signal a red flag for the brand versus litigation issues that signify a franchisor simply enforcing the integrity of the brand. But the latter may still signal potential issues in the franchisor’s process, meaning that the brand may not have a great system for selecting franchisees. Look at the details of the specific lawsuits as well as the relative number of lawsuits per total number of franchisees. Once you have hundreds, or even thousands of franchisees, the chances for litigation issues to arise goes up. In this case, it’s especially important to make sure that you’re an ideal culture-fit for the brand before signing on.

ITEM 4 (Bankruptcy)

  • Bankruptcies are certainly more common and less stigmatized now than in the past, so don’t immediately move onto the next brand if you see case(s) here. But it goes without saying that bankruptcies can indicate inefficiencies and inexperience within higher level leadership and business strategy echelons.
  • If you see multiple examples, or if any of the C-level executives have been involved in a bankruptcy, ask for more information and dig deeper to understand the why. 

ITEM 5 (Initial Franchise Fee)

  • Some franchise brands don’t charge a flat fee. Occasionally, they base the charge according to local population size or zip code. Make sure you are crystal clear on what this amount would translate to in your community and market.
  • KGP – If a “range” of initial fees exist it must be disclosed.
  • Less expensive franchise fees don’t always indicate a good deal. In my experience, this often suggests that the franchisor hasn’t been as successful in attracting a talented pool of franchise owners. As a result, they’ve resorted to cost-cutting to entice a better pool of candidates. Lower franchise fees will likely come at the expense of the quality support systems and resources for the brand’s franchise owners. Higher franchise fees allow brands the ability to reinvest in themselves at higher rates, enabling them to hire more staff as needed to serve critical functions for the brand overall, such as marketing efforts to attract additional highly qualified franchise owners.

ITEM 6 (Other Fees)

  • This is where you will find the royalty payment structure. This is typically the largest fee you pay in exchange for the right to be a franchise owner. Make sure you understand how much the royalty amount is and how it compares to other franchise brands in this market segment. Keep in mind that this fee is non-negotiable for a quality brand. If the number is too steep relative to the financial franchise opportunity, then it’s time to move on.
  • If there isn’t a great deal of information on the local advertising fee, the franchise disclosure document review call is a great time to understand where that fee is being applied.
  • KGP – Ask for support documentation. This is especially important where a “national” fund is required, and yet no national advertising exists.

ITEM 7 (Estimated Initial Investment)

  • In addition to the estimation of what you will spend in each bucket, (i.e. training, construction, signage etc), you’ll see a table next to each line item indicator making clear to whom you will pay that money. If there are more than a few line items in which you pay the franchisor directly, it may indicate that the franchisor is profiting from your initial investment costs.
  • Most costs should be paid directly to third-party vendors where, due to the volume purchasing power of the franchisor, you should incur lower fees than a business owner in the same industry who goes it alone. This is one of the top franchising advantages, and if you’re not gaining an advantage in this area, consider looking into another franchise opportunity.
  • If there are a number of franchise competitors in the same space, I’ll often pull FDD’s from competitors to better understand how the investment compares to other options for franchise buyers. Here’s a few States that provide access to FDDs: California Indiana Minnesota Wisconsin
  • IMPORTANT: many franchisors tend to underestimate the 3 months working capital line. To properly forecast costs, ensure you ask current franchise owners what their initial costs were and draw specific attention to that line item.
  • KGP – The majority of FDDs indicate 3 months only, which could be in direct conflict with the ultimate BEP and Pro-Forma calculations the Franchisee may have established. Attorneys use templated franchise FDDs and Agreements where possible thus, the 3 months is typically standard language. The franchisor also wants to have the investment appear low where possible. My experience tells me that you’ll need a reserve of no less than six to eight months of working capital.

ITEM 8 (Restrictions on Sources of Products & Services)

  • Paying franchisors for certain products is mostly positive if it allows the franchisor to maintain consistency and quality. But some low quality or unethical franchisors gouge franchise owners by demanding higher prices than the franchise owners could source themselves.
  • KGP – Specifically an area where the franchisor may be reaping benefits via required sources that are providing “rebates” to the franchisor.  This, too, must be disclosed.
  • When speaking with franchise owners, it’s a good idea to ask about the items they must buy from the franchisor directly (or their designated suppliers). While in some cases, brands may be attempting to profit from deals with higher cost suppliers, some brands use their scale to leverage better supplier relationships at the corporate level, guaranteeing lower cost goods to their franchise owners.

ITEM 9 (Franchisee’s Obligations)

  • This section is often quite exhaustive, but don’t stress! This is one of the sections where the franchisor protects itself from the possibility that individual franchise owners are able to bring down the whole system. Don’t interpret all the responsibilities here as your sole responsibility. Good brands have support personnel and processes in place to ensure you’re supported at every step.

ITEM 10 (Financing Options)

  • Most brands don’t offer financing options, so don’t expect to see anything here in most cases. However, high quality franchise brands often have strong relationships with 3rd party finance companies and will help streamline establishing that relationship and process for you.

ITEM 11 (Franchisor’s Assistance, Advertising, Computer Systems and Training)

  •  At a minimum you should see obligations from the franchisor to assist with:
  1. Training
  2. Site Selection, Lease Negotiation, & Construction Management (if a retail location)
  3. Permitting
  4. Advertising
  5. Website
  6. Software support
  7. Ongoing operational assistance
  • Once again, keep in mind that all good franchise brands go above and beyond this list. They provide whatever support services necessary in order to ensure their franchise owners are profitable. Without the majority of owners being profitable, they can’t survive. For that reason, you can expect strong brands to be no more than a phone call away for anything the franchisee needs.
  • KGP – Be mindful that although the franchisor will typically require “site approval” they make clear that they are not responsible for the success of your location.  Additionally, where construction layouts and “standard” plans are provided, it will be your responsibility to meet, use requirements, code requirements and approvals for your location (likely through your architect, civil engineer, and contractor(s).

ITEM 12 (Territory)

  • Particularly when encountering lower quality franchise brands, this can be a point of frustration for franchise owners who often feel that the franchisor is placing new franchise owners too close to their territory. Oftentimes, this is true. Inexperienced or poor-quality franchisors will deliberately cram as many owners into a geographical region as possible in order to maximize their franchise fee earnings. Always confirm with franchisors what their experience with territory has been and what you should expect as a franchisee.
  • KGP – Beyond requesting or asking about territories, they should be well defined, made part of any agreement via documentation and addendum, and watch for the franchisor’s ability to add company locations in the Franchisee’s territory. Franchisors may also lay claim to “national accounts” that fall within your territory.  Understand how revenue is to be shared, if at all.  Similarly, be mindful of “online and internet” product sales and how revenue is shared in that space as well (if at all).
  • Sometimes it helps to have franchise owners close to your territory borders. Indeed, good franchisors know how to balance giving franchise owners enough breathing space to operate in with managing growth in a strategic way that maximizes their ability to gain traction, dominate the market, and outpace the competition.
  • KGP – As franchisors attempt to obtain increased market share and “preeminence” where possible, always require a “right of first refusal” on locations that may cannibalize your own location or area.

ITEM 13 (Trademarks)

  • This one seems so simple and straightforward. Most people look it at for just 2 seconds and move on. But I’ve had negative experience with two brands in my career due to not fleshing this out more. These brands had incomplete or missing trademarks for their brand names, and as a result, their competitors later file suits against them for trademark infringement. Luckily, both brands were small, but even still, the franchise owners had to go through an unfortunate process of rebranding their entire businesses.
  • A quick google search of the trademarks can reveal any competitors that you can bring to the attention of the franchise and ask for feedback.
  • KGP – A google search may sometimes not be enough.  Check the www.uspto.gov site and use the “tess” research capability to confirm trademarks.  Make a particular note of marks being active and remaining terms before re-submission approvals.
  • If the franchisor acknowledges an issue here, in terms of lack of trademark, and based on my yucky two experiences, it is often a quick reason I pass on the brand. But make sure to ask if you’re unsure, since very young brands may be in the process of securing trademarks and/or obtaining new trademarks. If not listed in the FDD, the brand should still be able to provide information about where they are in that process.
  • KGP – The franchisor being “in the process” may possibly not be enough.  You are investing in a brand, its marks, and its operations in the aggregate.  The trademarks are vitally important to your license and purchase. They will inevitably be a significant portion of your equity should the brand(s) become successful.

ITEM 14 (Patents, Copyrights and Proprietary Information)

  • This is typically predominantly copyright of brand assets and can more often be found in more detail by requesting to see the “brand standards” manual.
  • KGP – It is highly unlikely that a franchisor will provide you with the “brand standards” or  “Operations” manual before you actually invest in the brand, even with an NDA (Non-Disclosure Agreement). This is SO very important in that the “brand standards” and “Operations Manuals” may supersede requirements and expectations within the franchise agreement. The franchisor will also indicate that they may be changed, modified, and updated at any time.  It could have a material impact on your business and how it’s to be conducted.

ITEM 15 (Obligation to Participate in the Actual Operation of the Franchise Business)

  • If you’re interested in the idea of keeping your day job and investing in a semi-absentee franchise, ensure that this section clearly spells out that the franchise can be run by a designated manager. Do know that most brands will want the owner to invest time into the business at the beginning and will want to see that owner come in for training even if they have a general manager already hired and ready to spearhead management.
  • Furthermore, most brands want to see the owner directly involved in the business for the first six months to a year, in some capacity. If the owner is not trained on how to run the business, they won’t have the institutional knowledge necessary to manage their own general manager.

ITEM 16 (Restrictions on What the Franchise May Sell)

  • Depending on the brand, there may be more or less room for flexibility here, but all good brands will exercise some degree of control over this area. Certain brands will want precisely the same goods and services offered at every branded location, while other brands, especially in the restaurant industry, are willing to be a little more flexible if it makes sense to offer a ‘local market item’ or beta test something that might benefit the brand as a whole.

ITEM 17 (Renewal, Termination, Transfer and Dispute Resolution)

  • You might see that many franchise brands don’t give the franchise owner the power to terminate the agreement. No cause for alarm here, as it’s quite standard– it’s just another franchisor tool for preventing one franchise owner from having the power to bring down the entire brand. In most cases, brands won’t penalize a franchisee who is unable to continue forward due to economic circumstances or significant levels of personal stress. If you cannot move forward for either reason, in most cases the brand will understand and either help you to exit via a sale (if you have built up equity that can be sold) or a shut down and debranding of the location. Additionally, the brand may purchase your equipment at a predetermined rate or you may have the option to sell it elsewhere.
  • I like to see 10-year terms in our franchise agreements. 5-year terms are sometimes a way of the franchisor trying to profit off of franchise fees and renewal fees, so be cognizant of that, but five year terms also allow brands to make overhaul changes to their franchise disclosure document and franchise agreement more easily. The devil is in the details.
  • KGP – Any renewals, whether five, ten, or multiples of those numbers, typically require the franchise investor to sign the “then current form” agreement at the time of renewal.  These agreements may have a substantial impact on your franchise, territory, and operating conditions, as well as fees, due to changes in the agreement(s). There may also be additional license fees and remodeling and/or updating requirements you’ll need to know about concerning possible costs/investments.

ITEM 18 (Arrangements with Public Figures)

  • This sounds like it should always be a good thing to see in a franchise disclosure document. But be careful. The list of ugly endings to relationships with franchisors and public figures is relatively extensive.
  • If the public figures reputation goes negative, as in, they do something bad – then the franchise brand can feel that. So, look into the history of the public figure and access your personal view on risk vs reward in attaching that person to your potential brand.
  • KGP – As a personal preference, I often never suggest brands that are tied to a public figure/celebrity.

ITEM 19 (Financial Performance Representations)

  • Admittedly, this is typically the part of the franchise disclosure document that I skip to first. To qualify to be a Raintree brand, the franchise needs to be able to exhibit truly elite economics, and this is the first place that allows us to understand if the brand can deliver an ROI that our typical franchise owner clients like to see.
  • If hear a franchise representative tells you that you “can make X %”, and it isn’t a number that you see in the Item 19, they are either potentially lying to you, or are making what’s called an “Earnings Claim”, something the FTC outlaws, you should likely move on to find a more ethical franchise.
  • The franchisor(s) you are evaluating may not have any information here. That represents about 30-40% of the brands I evaluate every year.
  • Many franchisors fear the perceived legal risks associated with publishing revenues or profits in this section. I’ve gone on to invest and/or represent franchise brands that fall into this category, as the economic, while not easily found, ended up being strong.
  • Franchise brands who believe listing their financial performance for the previous year was underwhelming and ultimately might hurt their ability to recruit owners. If our analysis suggests this to be the case, we run like the wind, and you might want to also.
  • Some brands may not be able to produce information because they are too new and are not legally allowed to put in any information yet. Younger brands, especially brands under two years old, may just be compiling enough information to justify the inclusion of an item 19 in their franchise disclosure document. Another possible situation occurred quite frequently over years 2020 and 2021, when the pandemic resulted in a number of businesses closing down for all or part of those years. Even if there were sales numbers available for previous years, the lack of consistent reporting due to differences in locations’ operating times and individual state laws led to brands not being legally permitted to include anything in their franchise disclosure documents for previous years’ sales.
  • Even when franchisor’s list detailed P & L’s, you should also read the notes for each table or representation. Often, poor quality or unethical franchise brands can manipulate the data in certain ways. For example, sometimes franchisors list their corporate locations P & Ls to highlight their profitability. However, they fail to deduct the expenses a franchise owner would have, like the royalty, marketing fund or franchisor-specific profitability benefits. Ensure you understand the represented locations variables and if they match up to what the average franchise owner would deal with.
  • Whether the franchisor provides information on their financial performance or not, you should never rely solely on information the franchisor provides you on earnings potential. You should verify your understanding of ROI potential when you hear from the franchise owners too.
  • KGP – Note that you should request all of the information substantiating how the numbers in item 19 were derived.  Without this support documentation, the numbers are useless. Be wary of numbers representing company-operated locations compared to Franchisee operated locations. In many instances, franchisors do not collect franchised-operated location financials using a standard format, if at all.  Information may not be accurate unless the franchisor has a method for collecting uniform and consistent data from its Franchisees whereas you would be entitled to review the supporting documentation. Notice also the percentages of locations or areas that are listed in the top, midrange, and lowest revenue or profits (if outlined).  I’ve found that some franchisors through advertising will often only list the “top” performing locations and areas without, in the advertising, disclosing mid and low numbers. Last, be sure to see in what year the data provided is from. If you are considering a license this year, be sure the numbers in the FDD represent the company’s last fiscal year and not a couple or a few years back.
  • ITEM 20 (Outlets and Franchisee Information)
  • IMPORTANT: One of the most important factors influencing a franchise’s financial health is whether the franchisees who sign on and open a unit actually stay in business. There are franchises that stay open, even though barely making a profit, because it would be too costly to close down. Businesses with high overhead costs, specifically, don’t tend to close down and instead have a higher flip rate, where another buyer might come on for reasons like high cash flow or strong right offs. In my experience, everyone believes they’ll run the business better, but very few actually look under the hood first to make sure they understand what they’re getting themselves into. In this section I’ll look to see if there is negative growth (closings) and if so, I’ll mark it at the top of our list to learn why. Negative growth or even slow growth can be an indicator of an ineffective business model or support program. A high-failure rate is, of course, a red flag.
  • The information under this item can also be an indicator that the franchise brand is an ineffective recruiter of new owners. We have several brands that have had almost zero growth in the three-year window, but the business models were strong. We have gone on to represent them, fixed their recruitment issues, and witnessed their growing national success. But on the flip side, looks can sometimes be deceiving. If a brand is growing quickly, then it might be identifying hotter markets and anticipating higher openings in select markets. This might offer a clue about upcoming strategic initiatives that a prospect might want to follow up on in order to gain additional insight.
  • I dare say ignore the Projected Openings table. Most brands we work with are purely guessing how many franchises they plan to award and open in specific states, as most franchises recruit nationally. In short, this data is typically an optimistic guess from the brand and cannot be relied upon when buying a franchise.
  • KGP – Investigate the brand’s “churn.” Open then closed, pipeline and those actually developed, number of transfers, and resales.

 ITEM 21 (Financial Statements)

  • Be sure you understand that these are the FRANCHISORS’ financial statements, and NOT those a franchise owner. Ensure the franchisor has assets in the franchise entity and should be at least equivalent to the investment of a franchise. In short, the franchisor should be carrying at least the same amount of risk that you are.
  • Look for any long-term debt. Here the risk is of a franchisor who is forced to use franchise fees and royalties to repay debt, and not put what’s needed back into growing the support infrastructure
  • Overall, a brand’s financial statement may not fully reflect the strength of the system, meaning that a strong system will be reflected more by the number of owners coming into the system, item 19, the satisfaction level of franchise owners (when you speak to them), the growth rate of locations, and especially the success levels of owners who open multiple locations. All of this information will be reflected in other parts of the document but may not be reflected here. You’d rather see the brand reinvesting dollars into their own growth than hoarding and storing away their profits. If you don’t know how to identify any of the points raised above, it might be a good idea to get an accountant to review and interpret this section for you.
  • KGP – The “franchise knowledgeable accountant” must be made a definite part of your team. Franchisor financials must be audited if locations or areas have the pre-requisite amount of time opened (typically a year to two years).

ITEM 22 (Contracts)

  •  IMPORTANT: what information is included in a franchise agreement, and how does it differ from the franchise disclosure document? This section helps to understand what the franchise agreement will entail. The franchise disclosure document is not a legal document, but the franchise agreement referenced in this section is. Make sure the terms of the agreement accurately reflect what you’ve read in the franchise disclosure document.
  • KGP – A Franchisee Centric attorney must be made part of your team before executing a franchise agreement.  Where possible, use an attorney who does most of their work on the Franchisee side rather than the franchisor side. This comment is a personal preference of mine.

 ITEM 23 (Receipt)

  • You’re not obligated to anything by signing this. The FTC wants to make sure you’ve been delivered the franchise disclosure document at least 14 days prior to signing a franchise agreement. Signing this item communicates nothing more than an acknowledgement that you’ve received the document.

Summary

As you can see the franchise disclosure document fills in the blanks for a lot of the questions that you might have. But this document still may not provide the complete picture of whether the brand is right for you. Many people drop out at this step simply because they find the legalese in this document too overwhelming, even if this step doesn’t require the establishment of a legal relationship or obligation.

Individuals who are able to appreciate the necessity of the Franchise Disclosure Document and respect the intention behind its main objectives are the individuals who go on to investigate the merits of working with that particular brand, and ultimately the ones who benefit from becoming franchise owners.

Taking the tips above, remember to review the franchise disclosure document from a business partnership standpoint. As you identify any points in the FDD that bring confusion or concern, note them down, and ask those questions directly to the franchise representative. After having your questions answered, if you feel that the concerns from a business partnership standpoint remain strong, it might be time to move on to the next franchise brand.

From a legal review standpoint, it’s best to wait until you are closer to being approved before you engage the services of a franchise attorney. You don’t want to spend a few thousand dollars for legal work, only to find out you’re not going to be a fit for the brand.

At Raintree, we see about 20-30% of the candidates engage the services of an attorney for a review of the franchise disclosure document. This is primarily because our candidates know the FDD is non-negotiable. We ensure equality for every franchise owner in ensuring they all sign the same franchise agreement.

If you do feel like you want an attorney to review the document, it is HIGHLY recommended you use a franchise-specific attorney. The average attorney won’t understand the nuances of the franchisor/franchisee relationship, and ultimately, you’ll be wasting your money by having a regular attorney comment on something they don’t understand.

Lastly, remember that if you’re moving on to the next phase, don’t forget you list of key questions/concerns here. Especially in relation to Item 7, and Item 19. You’ll do very well to verify these by hearing directly from the franchise owners themselves.

To learn more about some of the brands Raintree represents/recommends, head to their franchise ownership website.

Authored by 

Brent Dowling

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