This lesson is part of our free Franchise 101 course.
When it comes to picking a franchise, the single most important source of information you can consider is the Franchise Disclosure Document (FDD). While you can’t rely on this alone to tell you about a franchise, it gathers together critical data that shouldn’t be missed.
What Is a Franchise Disclosure Document?
An FDD is designed to inform potential franchisees about what they are getting into. Every franchise is legally required to update their FDD each year and provide it to prequalified franchisees. It contains information about the costs and performance of the franchise.
This means that the FDD provides you with some of the most important information, and that the franchise is forced to be honest in what it presents. A standard format means that you get roughly comparable data for different franchises.
But that “roughly” is important, because the rules aren’t hugely specific, and that can create problems for the unwary. Franchises will try to present themselves in the best light, and you need to understand what lies beneath their words.
What Are the Key Items?
There’s a lot of information in an FDD, and it’s all worth reading, but there are certain items that you should pay particular attention to:
- Items 5 and 6: These cover fees, both one off and ongoing, including those for joining and leaving a franchise.
- Item 7: This covers costs. It lets you know how much you’re likely to spend in setting up a location and running it for the first few months.
- Item 19: How the franchise performs financially. This is critical, but there’s no standard for what information has to be presented, or how.
- Item 20: The number of franchised and company-owned outlets, which can show whether a company is growing or shrinking.
Finding Help Interpreting FDDs
While all franchises have to provide information for all these points, they don’t have to do it in the same way, or to present the context that will let you understand it. That’s why getting outside help is important.
One source of help is the FDD Talk posts on Franchise Chatter. These drill down into the most important sections of each FDD. This includes analyzing data from the critical Item 19, so that you can understand a franchise’s performance. While FDDs aren’t consistent in how they present their information, FDD Talk posts are, making it easier for you to compare different franchises and evaluate which one is right for you.
FDDs are crucial to picking a franchise, so if you’d like some support in understanding them, check out our FDD Talk posts.