Hey Ive received an FDD Where in the world do I start this thing is huge

Hey, I’ve received an FDD. Where in the world do I start; this thing is huge?

First and foremost do not panic, even if the FDD is 400+ pages. There is a tremendous amount of information in a company’s FDD. The more they have to disclose, the longer the FDD. We have seen some as short as 70 pages and others longer than 400 pages.
It is important to digest this document in bite sized pieces and it important to know what you should do when you receive an FDD.
We recommend the first thing you should do is review Item 23 which should be the last page prior to financial disclosures. Some companies place this in the front so that you see it right away. This is your evidence that you have received the document and the date you have received it. This is important because Federal Law requires that the FDD is provided to all potential franchise buyers either at the first personal meeting (i.e. franchisor and possible franchisee meet face to face) OR 10 business days prior to executing a franchise agreement. As a side note, it is ALWAYS our recommendation that our clients confirm they have financing arranged and confirmed before signing a franchise agreement as franchise fees are typically non-refundable.
As you can see, this is an important date and it requires written documentation. Your signature and date on a returned FDD Item 23 IS required before you can move forward to purchase your franchise so get this in the mail promptly. This is not a binding agreement, only confirmation of the date you received the document.
As we have already mentioned, this is a large document and it should not be attempted in one review. We recommend you use the following outline of the Items and what they will discuss. Find the areas that are most important to you first and start with that.
If you are most concerned if the company gives earnings claims and if so, what are they, then proceed to Item 19. Earnings claims are optional and may or may not be included, but this is as good as any place to begin your review. (For more details on how to gain information when there is no Item 19, see our article 4 in this series. It is entitled ‘How much can I make if I purchase this franchise’?)
We strongly recommend that you review this document totally, but do it in sections and make notes. So with your pen and paper or your computer or whatever, go through each section and make thorough notes. Any wording that is ambiguous, make a note and always ask for clarification. Never be embarrassed to say you are unclear on some sections and ask for clarification. This is a disclosure document and it is critical that you suffer no surprises if you choose to proceed with the franchise company.
Following is a brief synopsis of each section and the items that should be included within each. The goal of this document is that every potential franchisee is to disclose the terms and conditions of operating the franchise you are considering. This document acts as the disclosure document for the Franchise Agreement which will be much briefer than the FDD.

The Items included and what they cover, a road map to your FDD

Items 1 through 4: The franchisor's background, the experience of key executives and the company's litigation and bankruptcy history.
Items 5 and 6: This section covers all the fees charged by the franchisor. Item 5 is specifically regarding the franchise fee. Please be reminded never to sign a franchise agreement without thorough review of this section. Franchise fees are often non-refundable and if you execute a franchise agreement without having any financing confirmed, you could lose this money.
Item 7: An estimate of the total investment needed to establish the business and it is generally in a worksheet format. This is helpful for easier review. We strongly suggest that you compare these estimates with franchisees when you are speaking with them to see how well they compare.
Item 8: Restrictions on the purchase of products to be used and sold in the unit
Item 9: The franchisee's obligations in 24 different areas of operation
Item 10: Financing that the franchisor makes available to potential franchisees. Franchisors are not required to offer financing options, but some do so pay attention here. Often the franchisors have relationships with preferred lenders and this can be helpful for you but make certain the terms are acceptable for you.
Item 11: A summary of the services, such as training and site selection that the franchisor provides in relation to the franchise program. It is helpful to remember that often one of the primary reasons for purchasing a franchise operation is for the training and additional support services provided. This is frequently one of if not THE longest sections of the disclosure document. It is important that a potential franchisee is satisfied with the training, support and other services provided.
Item 12: Territorial protections and exclusive rights. It is important to note, these territories are only for the franchise company you are reviewing, and this does not prohibit a competitor from encroaching your defined territory.
Items 13 and 14: The status of the trademarks, copyrights and patents associated with the program
Item 15: Obligations of the franchisee to participate in the actual operation of the franchised business will be addressed in this section. Some franchisors will allow passive ownership, others will not. The commitment for the owner will be outlined in this Item.
Item 16: Restrictions on what the franchisee can sell
Item 17: Renewal, termination, transfer and dispute resolution provisions
Item 18: Public figures used to promote the franchise
Item 19: A description of how well the franchises perform financially (many franchisors do not provide this information; rather they encourage the potential franchisee to contact current franchise operators and get their feedback. This is generally considered better and more thorough for the potential franchisee) If the information is included be certain to share this with your accountant. It is also a good idea to confirm this information with existing franchisees when it is published. When it is not, be very specific in your questions with the franchisees you speak with.
Item 20: In this item, the franchisor must disclose information on: the number of franchise units; name, address and telephone numbers of all franchisees (up to 100); number of new franchises predicted for the upcoming year; and information and contact information on franchisees who have ceased to be franchisees.
The information provided covers from three years back to projections to one year ahead. This should give you a sense of the direction of the franchise. Again, talk to as many current franchisees as you can. A large and quick expansion of a franchise in terms of number of outlets is not always the best for franchisees; i.e., support services may suffer.
Item 21: Financial statements audited by an independent CPA must be provided. They include: (1) for the last three fiscal years -- cash flow statements, statements of operations, and statements of stockholders' equity; and (2) for the last two fiscal years -- balance sheets.
These statements can be difficult to understand, so it is important to have your accountant review and evaluate these financial statements.
Item 22: This section will include all copies of contracts you will be expected to complete if you purchase a franchise from this company. These contracts are not required to be in ‘plain language’ like the FDD so it is important to have a qualified franchise attorney review these with you.
Item 23: We discussed this first. It is the receipt and should be executed promptly.
Following Item 23 there will typically be a number of. These may include:
• Franchisor's audited financial statements
• A copy of each form and contract you will sign if you buy the franchise: franchise agreement, receipt form and other applicable forms (i.e., confidentiality agreements, non-competition agreements and software licenses)
• For multi-state offerings: a list of franchise regulators in each state; a list of franchisor's agents in each state; and other state-specific supplements required to conform the UFOC to applicable state law.
And now what?

Much of the document you will read will be in plain language and you will be comfortable with the text, other information may be more complex. For this reason it is always recommended that you utilize the services of an accountant and a qualified franchise attorney. We recommend ‘qualified franchise attorneys’ because they are used to documents and have knowledge of what is and what is not negotiable. Remember, the intent of this document is that every potential franchisee receives the same information. While changes are not impossible, they are rare and restricted to certain Items.
Clearly, this is a lot of information to digest, but it is critical that you take the time to do so. In fact, the Federal Trade Commission ( www.ftc.gov ) ensures that you have that time to thoroughly review the FDD. As we have mentioned the FTC enforces a minimum waiting period of 10 business days before any money is paid and any agreement to purchase is signed.
There is no benefit to researching a franchise in “secret”. Do not hesitate to talk with the franchise directly. It is the best way to get questions answered and it is the only way to secure a free copy of their current FDD. Also, do not assume the company views your questions as a sign that you are ready to move forward. They understand that they are likely one of many opportunities you are investigating (just as you are one of many candidates they are considering).

Finally, while the FDD is perhaps the single most comprehensive resource document for finding the best franchise business partner, it is not the only one. There are many other factors, not the least of which is taking the opportunity to meet the franchise management face to face. Almost all franchisors regularly schedule candidate visits to their corporate headquarters, commonly called “Discovery Days”. It is these events that allow you to talk with top level management and get a real insight to their training program, ongoing support, and personally meet those you may be working with years to come. Meanwhile, think of the FDD as the franchise’s resume— a very large one indeed — and use it to determine if this is the best franchise opportunity for you.



Hey Ive received an FDD Where in the world do I start this thing is huge - To learn more about this author, visit Mike Callahan's Website.

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