What Buyers Should Know About Franchise Disclosure Documents

Let’s face it. There is nothing fun or amusing about a Financial Disclosure Document (FDD)that is legally required of your prospective franchisor, so you will have complete transparency in the deal you are considering. It’s a contract, with page after page of dry, dense legalese, for your lawyer to go through and explain.

Like all contracts, the FDD is a guide to the type of business relationship you will have with your franchisor. Different areas are important to different people, but there are some critical concerns to seek out with your attorney. They can identify potential red flags and explain the pros and cons, but it’s up to you to ask the franchisor to clarify any provisions or questions until you’re satisfied with the answers.

Length of agreement

of duration of the agreement it can tell you if you will have a stable, predictable relationship or if you may have to deal with sudden and unwanted changes. I lean toward a longer franchise deal that can be set down the road, rather than a five or ten year deal. Five years go by very quickly; just as you’re getting your base, it’s time for a new deal with any or all changed items, including a higher royalty rate.

A longer agreement is better for both parties. It protects the franchisee’s investment and makes the franchisor more sustainable. At United Franchise Group, our brands have agreements that are 25 or even 35 years; I’m glad we’re not constantly renewing and renegotiating. However, make sure you’re not locked into a ten-year deal without being able to transfer or sell the business if you want to.

Brand rules

of deal it should define exactly what products are offered and how much freedom you have to change them. A successful brand will give you very little freedom, which you should know well before you get to the FDD stage. You’d be surprised how many people have tried to “change” things that go completely against their franchisor’s brand.

The brand, not the franchise, defines things like the products you sell. If you shop at a burger chain, you will be selling hamburgers, not hot dogs. And if you try to change the main menu, you will have a problem. Your franchisor is selling brand awareness and may have locations all over the world. Customers want and expect the same customer experience in every country.

The same goes for things like hours of service, employee uniforms and store design. A 24-hour coffee brand won’t be happy if you decide to close on Sundays, change the store’s colors, or otherwise deviate from the brand profile.

Look at it this way: You’re joining a club. This club says, this is what we do and here are our rules. It is your choice whether you want to join that club or not. If you want to change it, what’s the point of joining it?

Now, that doesn’t mean a franchise can’t make suggestions that match the brand. We get our best ideas from our franchise owners. Talk to your franchisor about what procedures are in place for accepting ideas from franchisees. If it’s important to you to have input into the customer experience, make sure the agreement leaves room for that.

Relationships matter

Beyond the legal and financial matters outlined in the FDD, you are entering a business that is all about relationships. The FDD goes in a filing cabinet and we never take it out. In fact, we pray that we never have to use it, which means that a franchisee relationship has deteriorated so badly that we have to resort to legal action.

To avoid this, we build our relationships and work personally with each other and help each other grow. If you provide ongoing training and support, maintain honest communication, and stay informed about how each franchise works, it’s much less likely that you’ll need to pull the document out of the drawer.

Like any brand, from time to time we have had a store owner deviate from the policies clearly defined by FDD. But I don’t think we ever approached it by saying, “Well, look here. According to page three, paragraph four, you have to do this or that.” Instead, we can say, “Here’s how some of our best store owners do it. We have a proven way of doing things, but you’re not following the program. Is there a reason? What’s stopping you?”

We do a lot of things that go beyond the scope of the franchise agreement while making sure everyone adheres to the formal contract. of FDD it’s just one of many tools both sides use to gauge each other. Talking to other franchisees is also essential for the prospective franchisee.

After all, FDD is an irreplaceable part of the franchise process. Understanding it (with the guidance of an attorney) can help you learn if you and the brand are a good fit.

Let’s face it. There is nothing fun or amusing about a Financial Disclosure Document (FDD)that is legally required of your prospective franchisor, so you will have complete transparency in the deal you are considering. It’s a contract, with page after page of dry, dense legalese, for your lawyer to go through and explain.

Like all contracts, the FDD is a guide to the type of business relationship you will have with your franchisor. Different areas are important to different people, but there are some critical concerns to seek out with your attorney. They can identify potential red flags and explain the pros and cons, but it’s up to you to ask the franchisor to clarify any provisions or questions until you’re satisfied with the answers.

Length of agreement

of duration of the agreement it can tell you if you will have a stable, predictable relationship or if you may have to deal with sudden and unwanted changes. I lean toward a longer franchise deal that can be set down the road, rather than a five or ten year deal. Five years go by very quickly; just as you’re getting your base, it’s time for a new deal with any or all changed items, including a higher royalty rate.