The Anatomy of an FDD

Reading the Franchise Disclosure Document, or FDD, might not be as entertaining as curling up with a good mystery novel, but it does provide most of the clues you'll need to find the best franchise for you. And you definitely don't want mysteries when you're looking at franchises--you want the most important facts presented to you in plain English so you have what you need to make a good decision.

For just that reason, the Federal Trade Commission requires that all franchise companies provide prospective buyers with an FDD organized into a common format to allow for reasonably easy comparison between franchises. Just think of this as the most valuable written tool you'll receive in your franchise research stage.

The FDD has 23 sections (referred to as "Items"), as well as exhibits that provide a ton of supplemental information. Here's a guide to understanding the FDD:

Items 1-4: History

Item 1: A general review of the company, including any predecessors or affiliates, and the opportunity being offered. This key overview of the business is one of the sections you'll want to review first. 

Item 2: Background data on key officers, directors, employees and any others who have management responsibility related to the sale or operation of the franchise. It includes a summary of their work experience from the past five years and any other experience they have as officers and/or directors of other companies.

Items 3 and 4: These include disclosures of any past or current litigation or bankruptcy on the part of the company or its key people.

Items 5-7: Fees and Costs

Item 5: Any and all initial fees you have to pay as you begin the franchise business.

Item 6: Any and all other fees that may be required in the subsequent operation of the franchised business, including royalty, advertising, renewal and transfer fees.

Item 7: An outline of every component of the initial investment you'll be expected to make in the franchise operation, including an allowance for initial advertising and operating capital reserves. This section is extremely important, but the value of the information is limited by the fact that the franchise company is required to express the data in a tabular form involving ranges of potential costs. Review this section with existing franchisees and the franchisor to determine the most accurate estimate possible for your specific location and circumstances.

Items 9, 11 and 15: Contractual Obligations of Franchisee and Franchisor

Item 9: Your obligations (as a franchisee), in a tabular format. The table lists major areas of responsibility in the business (for instance, obligations in relation to finding the real estate site for your business), then provides specific references to the exact sections of both the FDD and the actual franchise agreement contract that define the legal obligations you're assuming. Even though it might seem tedious and burdensome to complete all the cross-referencing that is required by the format chosen for this section, it is essential to your investigation. You should read through the entire FDD and franchise agreement first (to develop a strong overall knowledge base) before coming back to Item 9 and carefully checking each cross reference in the table. 

Item 11: The contractual support obligations of the franchisor. This is usually the longest section of the FDD and is very important because it tells you what you'll receive in exchange for the fees you're paying. The section outlines pre-opening assistance as well as ongoing assistance. It also provides extensive detail about the franchisor's training programs and any required franchise systems, such as computer point of sale or advertising programs. Keep your highlighter handy in this section to make sure you note all important information as well as any questions you may have.

Item 15: Explanation of exactly what your personal obligations are in relation to the operation of the franchise business.

Item 12: Territory

Item 12: What you will receive in terms of a protected or exclusive territory. You'll find quite a variance in this provision from franchise to franchise.