How to Read a Franchise Disclosure Document

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If you are considering becoming a franchise business owner, you will need to become familiar with the Franchise Disclosure Document (FDD). That is the legal agreement that defines the relationship between the franchisor and franchisee. Before signing on the dotted line, it would be prudent to consult with a franchise attorney who will review the document in detail. But it will also help you to understand the basics of how to read a Franchise Disclosure Document.

The FDD should provide you with everything you need to know about the franchisor's history, fees required of the franchisee, restrictions on your activities as a franchisee, and what services and materials will be provided by the franchisor.

While you should have done some due diligence before receiving the FDD and have a good idea of the franchisor's history and experience, this part of the document should be reviewed carefully for new information. The FDD will outline the experience of the franchisors, an overview of the market for that particular franchise, and some anecdotal information based on the experience of other franchisees. The franchisor is also required to reveal information about any business or personal bankruptcies and litigation involving the company. Either should obviously be a red flag for any potential investors.

Another important area to review covers all obligations of the franchisee. This may include royalty fees, initial franchise fees, and advertising charges. The franchisor will also provide information about operating costs for the start-up months, but bear in mind this is not necessarily an all-inclusive list.

Aside from fees, the FDD will describe other requirements of the franchisee, including which vendors may be used to purchase products and supplies, how the franchise name and logo may be used in advertising, and what the business territory will be. Maintaining a consistent brand is critical to the success of franchises, so compliance is expected and enforced by the franchisor.

The franchisor will in turn have some obligations to the franchisee. Those might include providing training, marketing materials and access to protected data€"the €secret sauce.€ It is important for franchisees to understand which services will be provided by the franchisor and what the new business owner will need to do on his own.

Some franchisors offer financing, and that information will be defined in the agreement. Financial statements will be included, and you should ask an accountant to help review those and provide reassurance the franchise appears stable.

The FDD, along with the Franchise Agreement, constitutes the legal agreement between you and the franchise. Reviewing those documents carefully with the assistance of experienced professionals will help get your new business off to a good start, and earn you some peace of mind.
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