The Franchise Disclosure Document: An Invaluable Buyer Asset

If you’re considering buying a franchise, you might not know that the franchisor provides all the information you need to decide whether this company is the right fit for you. In fact, they are required by law to give you everything upfront.

Franchises are regulated by the Federal Trade Commission, and the law that outlines what a franchisor must reveal was established in 1979. Once a prospective buyer and the franchisor have established a mutual interest, the franchisor will send the Franchise Disclosure Document (FDD.) Prospects are required to send back a receipt of the document, which starts the clock on the 14-day discovery and decision phase. The prospect can only purchase the franchise after the 14 days have passed.

You can see how this document is designed to protect both the buyer and the franchisor. Its structure provides almost complete transparency (more on what information franchisors provide later.) The process prevents a buyer from making a decision without all the information they need. It also protects the franchisor from being accused of misleading a franchisee.

This is different than any other kind of business sale or startup. If you’re starting your own business, you are relying on your own research and estimates (and hoping they’re correct.) If you’re buying an existing business, you’re relying on the seller to provide complete and accurate information. (Spoiler alert: it’s not always complete or accurate.)

But with a franchise, you get full disclosure before you’ve ever signed anything.

Here’s some of what the Franchise Disclosure Document includes:

• A history of the company and information about the executive team. They will be your partners in the business, so you’ll have some background. You can use it to decide whether they have the right experience to make them a fit for you.
• Financial reports for the last three years of the business. You’ll be able to see whether the company has a sound financial position and evaluate data about its growth.
• Whether there is any pending litigation against the company from franchisees or regulators.  
• The cost of ownership. This is presented as a range based on historical data. Licensing, rent, the cost of labor, and other factors can vary widely based on location. But this line item clearly states franchise fees, buildout requirements, and other franchisee costs.
• Earnings claims: About 40% of franchisors include this information, which is also based on historical data. Some present it in quartiles, the top quartile has historically earned, the bottom quartile has averaged this, etc. Some companies present full financials from every franchisee as an addendum. No matter how much information you receive, you’ll want to talk to actual franchisees to verify their earnings and their experience with the company.
• That’s why it’s so valuable to receive a list of all existing franchise locations and complete contact information for the owners (including a list of those who have left the company within the last three years.) You can choose to talk to owners who are in the early phase of ownership or to the more established franchisees. Most busy owners choose to do group calls or Zoom meetings rather than speak to every prospect. But no franchisors are on the calls, so you can ask anything and get the unvarnished truth in return.

You can see why franchise buyers have more confidence than most business buyers. They have access to a proven model of success and a support system that helps them avoid pitfalls and maximize their earnings. The Franchise Disclosure Document also provides enough information to alleviate some of the anxiety of starting a new business. It helps you make a clear-eyed, informed decision about whether this opportunity is right for you.