The Franchise Disclosure Document (FDD) is a federally mandated document in which franchisors must disclose 23 items in a tightly defined format. The FDD must be presented to potential franchisees at least 10 days before the franchisee make a final commitment to purchase a franchise. The rigid framework imposed by the Federal Trade Commission (FTC) means that FDDs prepared by all franchisors cover identical topics in the same order.
Choosing your ideal franchise means selecting the best possible business that fits your strengths, has a strong financial and operating model and minimizes risk as much as possible. The FDD is a lengthy document that might seem overwhelming at first glance, but the FDD is an extremely valuable document in the sense that it addresses and answers the same core questions of every franchise in an orderly and consistent manner. There is little room for “creative prose,” so when comparing two or more franchise opportunities, the FDD provides an excellent apples-to-apples comparison for 23 key items.
Every franchisor must divulge the exact same bankruptcy and litigation information over the previous 10 years. The definitions included in the Franchisor Litigation and Bankruptcy section are thorough, and as such, answered in a standard format across businesses. Item 5, fees, is also an area that can be easily compared. These are the payments that are made to the franchisor before the franchise can be opened. A table in Item 6 breaks down all the other fees (outside of the main ones detailed in Item 5) that are payable to the franchisor during the franchise term. Placing these side-by-side for two franchise opportunities is a helpful exercise.
An interesting section, Item 12, Territory Rights, is not as apples-to-apples as some of the other sections. But looking at two or more different opportunities, you will quickly discern the scope of your rights both outside and inside your territory and how that might affect marketing initiatives. Item 13 (Trademark) is a fantastic comparable, because if the trademark is federally registered, you’ll find a registration number as well as the date it was registered. If the trademark is pending registration, then a serial number will appear. Having the trademark federally registered is vital, so it’s important to know where the business stands.
Lastly, the FDD is a great tool for comparing franchise opportunities on what’s known as “system stats.” Item 20 lays out a series of tables that details expansion/contraction and projected growth moving forward. The same can be said of franchise obligations as they are broken down via the same categories regardless of the business. The FDD is designed to disclose information in a standardized format and as such it is an ideal resource to compare one franchise to another.