TIP: How To Read An FDD

Understanding the FDD

Since 1978, the Federal Trade Commission has required every franchisor to develop a Franchise Disclosure Document (FDD). The FDD serves as the franchise’s core document; it provides you, the potential buyer, with all the information you’ll need to make an informed decision. Regardless of industry, size, or any other factor, all FDDs must follow the same format. It consists of 23 distinct sections or “items”, each of which answer a specific question. The FDD can seem overwhelming if you have never seen one before.

Here’s a small trick to make the document a little more digestible: rather than reading the 23 items in sequential order, try grouping them in accordance with what core question they answer. For example, to answer the question “what is the history of the franchisor”, begin your FDD review by scanning items 1-4 and 20.

What is the history of the franchisor?

Item 1: The franchisor information
The history of the franchisor, including any parent companies, predecessors, or affiliated entities.

Item 2: Business experience
Information about the founder and management team, as well as the operational history of the business.

Item 3: Litigation
Covers any litigation, going back ten years.

Item 4: Bankruptcy
Discloses any bankruptcies, either on the part of the franchisor or its founder.

Item 20: List of franchise outlets
Details all existing outlets and franchise information.

How much does this franchise cost?

Item 5: Initial franchise fee
Initial fees associated with becoming a franchisee, including the franchise fee itself, multi-unit fees, and necessary supplies/materials.

Item 6: Other fees
Outlines other ongoing fees, such as the royalty, training fees, technology fees, marketing fees, renewal fees, and any other fee required by the franchisor.

Item 7: Initial investment
This section provides a composite estimate of the total cost of opening a franchise location by combining the initial fees disclosed in Item 5 with estimates of construction/leasehold improvement costs, furniture, fixtures, equipment, signage, computer systems, rent deposits, insurance deposits, professional fees, grand opening expenses, etc.

What kind of support do I get as a franchisee?

Item 8: Restriction on sources of products and services
Discusses supply sources and ongoing operational items. This is especially important for food-based concepts.

Item 11: Franchisor’s obligations
Details the training, operations, and ongoing assistance that you receive as a franchisee.

Item 12: Territory
Outlines how the franchisor defines territory and the protections provided to franchisees. Item 14: Patents, copyrights, and proprietary information Details regarding copyrights and intellectual property of the business.

Item 17: Renewal, termination, transfers, and dispute resolution
Explores issues of renewing your franchise fee, grounds for termination, transfer options, and dispute resolution.

What are my obligations as a franchisee?

Item 8: Restriction on sources of products and services
Covers sourcing restrictions for products and materials.

Item 9: Franchisee’s obligations
Discusses your specific obligations as a franchisee.

Item 15: Obligations to participate in the actual operation of the franchise business
Details the expectations set forth regarding your ongoing participation in the business, specifically outlining where you need to be personally involved.

What are the economic expectations for my business?

Item 19: Earnings claim
Item 19 is the only section of the FDD that is not required. What is disclosed in Item 19 is up to the franchisor’s discretion. For example, some franchisors may provide gross sales metrics, whereas others may provide net earning potential.

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