Franchising 101: What is an FDD?
There’s one thing all franchisees encounter during the initial brand discovery phase. Near the end of this process, their franchisor will hand them a Franchise Disclosure Document (FDD) – arguably the most important document for a prospective franchisee during their franchise search.
The FDD outlines everything included in a franchise offer, providing details on everything from territorial restrictions to brand trademarks.
First-time franchisees might be overwhelmed by the wealth of information, so we’ve pulled five of the most important parts of any FDD. Here’s a brief breakdown:
Every FDD starts off with a complete overview and history of the company – this is Item 1.
In this overview, the franchisor must disclose any and all parent or sister companies, name or branding changes, when the company began franchising and so on. From a higher-level perspective, Item 1 offers franchisees a glimpse into how the company began, and how the brand got to where it is today.
When it comes to opening a franchise, oftentimes the number 1 hurdle is securing the necessary capital to cover startup costs. Prospective franchisees frequently have questions about financing and the initial investment for their new business. Item 7 of the FDD answers many of these questions.
This section goes over the initial investment for the franchise in detail, from the equipment and labor costs to computer software installation and development fees. It lays out the investment range for each line item, as well as the preferred payment method, due date, and personnel involved in the transaction.
Understandably, any interested franchisee wants to know what the job actually entails – particularly if they’re considering an owner/operator model. This is where Item 9 comes in.
Item 9 is essentially a list of obligations for the franchisee. It’s meant to be as transparent and straightforward as possible, so both franchisor and franchisee know what is expected of them. The list is presented as a table of contents with references to other sections of the FDD where franchisees can find more detailed information about each obligation.
Often seen as the most important section of the FDD, Item 19 provides the answer to the most common inquiry presented by franchisees – how much money can I expect to make?
Item 19 breaks down the financial performance of past franchisees and presents prospective franchisees with an idea or approximation for how much they can expect to make during their time in business. For franchisees hoping to calculate their potential ROI, Item 19 is crucial.
The degree of brand and franchise-wide growth can be an essential indicator of the overall health and strength of the business. Prospective franchisees can gain greater visibility into a franchise brand’s system-wide performance and expansion in Item 20 of the FDD.
Item 20 is formatted as five tables containing information about the franchise growth of the company over the past three years. This section gives franchisees an idea of the franchisor’s most recent pace of expansion, as well as additional plans and projections for future growth.
The stronger the figures in a company’s Item 20, the more confident franchisees can feel signing on the dotted line.