How To Quickly Review A Franchise Disclosure Document (FDD)

by | Oct 24, 2022 | Blog

When you’re doing a deep dive on a franchise, one of the key sources of information is the Franchise Disclosure Document (aka the FDD). 

In short, the FDD discloses 23 items of information to prospective franchise owners.

Its purpose is to disclose information in the franchise agreement in an easier way to understand as well as other important about the franchise business and company.

The thing is, it can be a few hundred pages and be overwhelming to navigate through, especially if you’ve never seen one before or are evaluating multiple franchises at the same time. 

Here’s a way to skim it so you can extract some essential information when you’re early on in the process.

But first, a quick disclaimer: If you find a franchise that you feel is the right fit and have spent time validating with franchise owners, and are planning to attend a Discovery Day, you may want to have a franchise attorney review it for you. This is the last step you can take so you don’t incur any legal fees earlier on while you’re evaluating. This skimming strategy will help you pull out the initial information to review and validate with existing franchise owners.

Ok, first, the numbers.

Scroll to Item 19 (Financial Performance Representations).

Item 19 will hold financial performance and unit economic information about the franchise. It’s optional for a franchise company to disclose any information here, but the strong companies are proud to disclose certain financial performance information. Plus, it’s supposed to be representative information to avoid cherry-picking. This information will help you build your own financial model to validate with existing franchise owners. 

Now, find Item 7 (Estimated Initial Investment).

Item 7 is a breakdown of the initial investment plus 90 days of working capital. It includes a line item breakdown and estimated ranges of costs for each thing you need to purchase or pay for to get the franchise open. There are typically a handful of items that make up the majority of the investment (e.g. franchise fee, vehicles, equipment, construction/leasehold improvement expenses, marketing budget, etc.). This is good information to help you build your budget and figure out your funding options. Speaking with franchise owners about their costs will also help you hone in your budget. 

Flip back to Item 6 (Other Fees)

Item 6 will lay out the ongoing fees you’ll be responsible for. So things like the royalty amount, national branding fund, technology fees, transfer fees, etc. This section will help you round out your Pro-forma. 

Now, you have a sense of the numbers, let’s look at the franchise’s track record.

Now, jump to Item 20 (List of Outlets). 

Here, you’ll see some charts that outline any and all locations that have opened, closed, sold, etc. over the previous three years. You’ll be able to get a sense of the track record. If you see a bunch of closures or terminations, that’s a red flag to evaluate.

Speaking of red flags, there are two other items to glance at.

Flip to Item 3 (Litigation).

Here you’ll see any lawsuits involving the franchisor, its affiliates, and any officers or key employees.

Continue to the next item (Item 4: Bankruptcies). 

Item 4 discloses any bankruptcies filed by the franchisor, its affiliates, and any officers or key employees.

While you’re in this area of the FDD, glance at Item 2 (Business Experience). 

Here you’ll find a list of the people connected with the franchise and their backgrounds. Personally, I like to see a leadership team who has experience with the company and others who’ve been involved in franchising. 

Now, flip to Item 21 (Financial Statements).

Here, you’ll find the franchisor’s financial statements, including balance sheets, income statements, and cash flow statements.

These will give you a sense of the franchisor’s financial health. 

Now, you scroll up to the Table of Contents and look for an Exhibit that includes a list of current franchise owners. 

This may be one of the most useful things you use to figure out how all the information in this FDD plays out in reality. 

Because you should use this list to contact existing franchise owners to have some validation conversations. 

How to validate properly is a big topic for another time, but the point is, here’s the list you can use to start your validation. 

The First Step is a Conversation.

If you have that burning desire to build your own successful business so you can live a life you can only have working for yourself, let’s talk.

The First Step is a Conversation

The first step is a pretty simple one: We have a conversation.

After we speak, we’ll be able to figure out if there is a good fit to work together.