Joel Libava
(Image: Does this couple know FDD’s are free?)
If you’ve been hunting for a franchise to buy for more than a minute, you’ve undoubtedly heard about Franchise Disclosure Documents, or FDD’s.
Hundreds of pages in length, the FDD provides data about the franchise opportunity that anyone who’s serious about owning a franchise receives from the franchisor. But know this:
FDD’s are only a snapshot of certain aspects of the franchise business you’re interested in buying. They’re not the actual business. And you don’t need to buy an FDD!
Read what my late father said about the Franchise Disclosure Document
FYI: The Federal Trade Commission (FTC) has rules that all franchisors must follow. Here’s one of them:
Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for — and get — a copy of the FDD once the franchisor has received your application and agreed to consider it.
But before I tell you why you don’t have to buy a FDD, I’d wager that you’d like to know what’s in it.
Elements of The FDD
There are 23 distinct items included in the FDD. Here they are.
1. The franchisor and any parents, predecessors and affiliates.
2. Business experience.
3. Litigation.
4. Bankruptcy.
5. Initial fees.
6. Other fees.
7. Initial investment.
8. Restriction on sources of products and services.
Pretty exciting stuff, right?
9. Franchisee’s obligations.
10. Financing.
11. Franchisor’s Assistance, Advertising. Computer Systems and Training.
12. Territory.
13. Trademarks.
14. Patents, copyrights and proprietary information.
15. Obligation to participate in the actual operation of the franchise business.
16. Restrictions on what the franchisee may sell.
17. Renewal, termination, transfer, and dispute resolution.
18. Public Figures.
19. Financial Performance Representations.***
20. Outlets and Franchisee Information.
21. Financial statements.
22. Contracts.
23. Receipts.
*** Item 19 is the most talked-about portion of the FDD, as it has to do with franchisee earnings. It’s also the #1 reason why would-be franchisees have an interest in buying Franchise Disclosure Documents.
Note: Only some franchisors provide earnings information. So, if the FDD you’re looking over has a blank space next to Item #19, the franchisor has chosen not to provide earnings data.
Finally, if you’d like to get specific information about all 23 items, read The Consumer’s Guide to Buying a Franchise-from the Federal Trade Commission.
Don’t Buy FDD’s, Because You Can Get Free Franchise Disclosure Documents
It’s important to know that unless you’re an attorney, a law enforcement official, or an investment banker, there’s really no reason for you to purchase a Franchise Disclosure Document. Why?
Because the salesperson of the franchise opportunity you’re interested in will eventually send it to you via email.
That said, people buy FDD’s all the time. Well…not all the time, but more than they should. But why?
A. Because there are websites that sell FDD’s.
B. Because that’s what some prospective franchise owners think they should be focusing on when they’re researching franchises.
What’s The Real Story?
The FDD Is a Non-Issue Unless You’re Interested in The Franchise Opportunity.
I’ll explain.
An Ice-Cream Franchise
Let’s say that a few weeks ago, you and your husband met some friends for dinner on “the other side of town.”
After dinner, your friends wanted to take you to a new new ice-cream place that recently opened. They had been there a couple of times and said that the ice cream was amazing. You guys were totally open to that idea, and you, like them were impressed.
As a matter of fact, you were so impressed, you grabbed a “Franchise Opportunities Available” brochure that was sitting on the counter. And since you and your husband were looking at franchises for the past 3 months…
Except this time, you decided that before you contacted franchise headquarters, and go through yet another 3-4 week process learning about a franchise, you would go find a place that had FDD’s available to purchase.
You figured why not get ahead of the game…you might as well find out about earnings etc., now. That way if the numbers on the FDD were just average, or below average, you wouldn’t need to waste your time talking to the franchise salesperson. Smart woman. So you buy the FDD for $190.
Then (of course) you flip right to Item #19. (Financial Performance Representations)
And in doing so, you come to find out that on average, the ice-cream stores are only doing $325,000 in annual sales. You’re disappointed, as that probably won’t lead to the six-figure income you’re looking to have if you become a franchisee.
So you and your husband chat, and you both agree to “recycle” the FDD. Wow. That was fast.
The Mistake That Was Made
It’s too bad you threw out recycled that FDD. Because the Hot Nights Ice Cream franchise opportunity would’ve probably worked out pretty well for you.
As a matter of fact, not only was there plenty of territory available on your side of town, but the executive team at headquarters had just launched an aggressive new franchise owner promotion you could have capitalized on. Something to do with new franchisees not having to pay royalties for the first 12 months their stores were open. No big deal. I’m sure you couldn’t have used that $20,000 in your startup year.
Your Mistake: Buying the FDD before you got the particulars about the Hot Nights Ice Cream franchise. Before you got the real story. Not the non-story contained in the FDD.
Note: if you’d like to upload a Franchise Disclosure Document for free, the Wisconsin Department of Financial Institutions offers no-cost FDD’s. All you need to do is type in the name of the franchise opportunity you’re interested in, and wait to see if the state has the Franchise Disclosure Documents you’re looking for on file.
Don’t Focus on The Franchise Disclosure Document (FDD)
Not only shouldn’t you buy a FDD, unless you really, really want to, you shouldn’t even look at the FDD until you have a pretty good understanding of the franchise concept you’re investigating. You’re putting the cart before the
Buying A Franchise?
You're Going To Need This!
That’s because when you look through the FDD before you have a good sense of the franchise opportunity you’re interested in, you’re selling yourself short.
Besides, most FDD’s don’t even reveal franchisee earnings or sales numbers.
And owning a franchise can’t be only about money.
- It’s about an opportunity
- It’s about having more control of your life
- It’s about not having a boss
- It’s about building equity
- It’s about having a sense of accomplishment
And so much more.
On Profit
Without exception, everyone I work with wants to own a profitable franchise business. No one wants to open up a non-profit franchise business. But the “money” part of the business only gets you so far.
To clarify, if you had a choice, would you rather:
A. Own and operate a franchise business where you make $150,000 a year, but you have to work 7 days a week, 14 hours a day to do so…and you’re miserable and exhausted all the time.
B. Own and operate a franchise where you make $75,000 a year, but you only have to be there 35 hours a week, and you love what you do.
Think about it. Hard.
Think about what it would mean to make pretty good money…but not have a boss to report to.
One more thing.
Profit is not a dirty word.
I hope you find a franchise to own that will provide you with a nice income.
But promise me this: promise you’ll look at the entire picture when you’re investigating franchise opportunities.
So you can be the boss of something you’re proud of.
