There is a document in the franchise industry called the Franchise Disclosure Document, abbreviated as FDD. The International Franchise Association acknowledges six segments of the Franchise Disclosure Document to be key informational points that assist you when judging the buying potential of a franchise. FranchiseYourBusiness.com agrees that focusing on and understanding these key FDD Items is essential for anyone considering buying a franchise:
Item 7: Costs
A few of these costs are averages and can fluctuate depending on your area. Speak with other franchisees of the brand who have been involved with the franchise for at least a year or longer to get an educated idea regarding how much money they needed from the very start to the time they became commercially successful. Ask how much capital they were able to earn from the business to support themselves financially.
Item 11: Franchisor’s obligations
Understand all of the services the franchisor is required to provide to you prior to opening your franchise such as site selection and real estate support, specific training, and resources and tools to help maximize your growth. Be guaranteed of the exact services you will receive for your grand opening in areas such as marketing, advertising, and field support. Ascertain services you will receive after you start managing your business in terms of further training, length of advertising, and continued support of operations. Clarify which services the franchisor must provide and the services they only might provide.
Item 17: Renewal, termination, transfer, and dispute resolution
Take as much time as you need to feel comfortable and confident that you understand the rights you will have and the rights that you are relinquishing. Examine any non-compete provisions closely and your responsibilities when the franchise relationship eventually terminates.
Item 19: Financial performance representations
Keep in mind that just 30% to 40% of all franchisors disclose prospective franchisees with information about the company’s financial achievement. This is why it is strongly recommended that you discuss sales and earnings capabilities with established franchisees.
Item 20: Outlets and franchisee information
Look into the number of units the franchisor has reclaimed and resold. If this amount is high, this may signal “churning.” This term is used when a franchisor repossesses unsuccessful locations and markets them repeatedly. Contact any franchisees who have parted ways with the system to learn the reason or reasons why they did so.
Item 21: Financial statements
Ask for the franchisor’s previous three years of financial statements and bring them to an accountant with expertise in franchising for evaluation. The financial condition shows the franchisor’s ability to run a lucrative operation and it also indicates if it may “crash and burn” and leave you financially stranded.
Item 22: Contracts
Double-check that all the agreements listed are affixed to the FDD and scrutinize each one.
FranchiseYourBusiness.com effectively navigates clients throughout the span of their franchising careers. Headquartered at 640 Freedom Business Center Drive, King of Prussia, PA, please call us at 833-372-6249 for a free consultation. Let us help you on your franchising adventure.