What is the Franchise Disclosure Document?
Prior to purchasing any franchise, a potential franchise owner must be given a copy of the franchisor’s Franchise Disclosure Document (FDD) at least 14 days prior to the completion of the franchise purchase. But what exactly is the FDD and why is it required?
About the FDD
In short, buying a franchise is a complex investment, and the FDD provides buyers with the necessary information to make a well-informed buying decision. The FDD discloses information about all facets of franchise ownership, including both positive and potentially negative aspects.
Created by the Federal Trade Commission in 1978, and made a requirement for franchisors in 2008, the FDD exists for two primary reasons:
- To protect potential buyers as a candidate
- To protect the franchisor against allegations of misleading claims
What does the FDD include?
The FDD includes 23 items, including the franchisor’s franchise agreement and various exhibits that include a list of current and past franchise owners and audited financials of the franchisor. To ensure accuracy, franchisors are required to update their FDD annually or when there is a material change.
The franchise agreement
Broken into two different pieces, the first half of the document describes in straightforward language what is in the actual franchise agreement, which makes up the second piece of the FDD and is written in more difficult-to-understand legal jargon. It is important to note that franchisors are not able to change the terms of the FDD or the information provided in it, as the Federal Trade Commission requires that franchisors play by the same rules. Franchisors can, however, provide an explanation or clarification of the information if there is a question.
History of the franchisor
The FDD includes the history of the franchisor, which can help to provide a more complete understanding of the company’s future growth and success. This includes the location of the franchisor and how long the company has been in business, as well as information about the leadership team. The FDD is so comprehensive that it includes background information - including anything negative like bankruptcy or legal trouble - for each member of the leadership team.
The FDD also lays out the initial costs involved in starting and operating a franchise, including the franchise fee and initial overhead costs necessary to get the business operational. In the case of The Growth Coach, the FDD also outlines the Winner’s Circle program, which provides a way for franchise owners to recoup their initial franchise fee by hitting specific milestones during the first five years of franchise ownership.
Included in the initial costs associated with franchise ownership are the royalties, which are usually collected by the franchisor on a monthly basis and are based on a percentage of revenue. Royalty fee rates vary among franchisors, typically from 4% to 12% of revenue, depending on the type of franchise business. Both parties benefit from the franchise fees and royalties if the franchisor offers a good business system, and the franchise owner follows it.
Other potential expenses
Another note about the expenses listed in the FDD is the requirement that any fee that could ever possibly be incurred by a franchisee at any time during franchise ownership must be showcased. Of course, a franchise owner may never come across a number of those fees. Some of the fees act as a safeguard to protect franchise owners from one poor-performing franchise to ensure that the actions of one do not negatively impact the entire brand. When read from the perspective that the language included is to protect everyone’s business, the FDD language makes more sense.
While the FDD provides all of the necessary information to make an informed decision about purchasing a franchise, it is up to the potential franchise owner to read it, understand it, and ask questions, when necessary. While the FDD is incredibly helpful in providing a wealth of information about the franchise opportunity, the success of a franchise owner typically depends on the work ethic and commitment of the individual franchise owner.
About The Growth Coach
The Growth Coach offers like-minded entrepreneurs lower startup costs, comprehensive training, high-impact marketing assistance, and ongoing support provided by a team of experts and a network of like-minded franchise owners. Founded on the concept that group coaching allows coaches to better leverage their time and build their business, The Growth Coach simultaneously benefits franchisees and the business clients they serve.
Are you ready to join Entrepreneur Magazine’s #1 ranked Business Coaching Franchise? Owning a Growth Coach franchise has never been easier and you can be up and running in just a few months. Check out our 8 Steps to Owning a Growth Coach Franchise, and contact us to get started.