In reality, it is critical that the prospective franchisee fully understand all elements of the FDD. Although the language is tedious and largely written in legalese, it is incumbent upon a franchisee (the person on the hook) to be fully aware of his or her legal and contractual obligations, as well as those of the franchisor. Although helpful, this responsibility for understanding can’t simply be relegated to an attorney or accountant. Especially if you are new to franchising, failure to be fully conversant with the language of the FDD could result in the worst decision of your life. Accordingly, take your time and makes sure that you aren’t caught unaware two years from now if a problem arises and you find that you didn’t understand one of the key terms of the contract.

 

 

    Most would suggest that the two most important elements of the FDD are:

  • Item 19, which provides some historical perspective as to what current or prior franchisees have “made” as a franchisee. You can purchase individual or packaged Item 19s on www.Item19s.com. Roughly 65% of franchisors currently submit this critical information (although not necessarily in the most expansive or informative format). The level of detail can run from half a page to 20 pages. Keep in mind that this is only a starting point from which to build your own financial pro formas.
  • Item 20 has two main components: 1) A summary of the franchisor’s growth (or contraction) over the past three years. If the system has undergone substantial contraction, determine what the underlying reason is. If the growth has been exponential, do they have the manpower and financial wherewithal to support new franchisees? 2) Item 20 also lists current and former franchisees (as well as their cursory contact information), providing the prospective franchisee with access to people who really know the business. Although it is not easy, a potential franchisee should contact as many current franchisees as possible to get their perspective of the investment. The ultimate question of an existing franchisees is – “knowing what you know now, would you invest in this franchise again” or, “would you recommend this franchise system to a family member?” If you don’t get a positive response, hopefully an enthusiastic response, then you should carefully reconsider.