The Franchise Disclosure Document (FDD) is perhaps the most important document you will read in advance of committing to a franchise. Its purpose is to give franchisees all the information they will need to decide whether franchising is a good fit for them. Each FDD is different, varying slightly depending on the franchisor, but they share several basic items in common. A FDD for a used car business opportunity, for example, will be very similar to one for a boutique clothing franchise, sharing key sections that are relevant to the franchise industry in general. Here are some of the main points you can expect to find in a standard FDD.
Financial Performance Representations
Franchisors are not obligated to provide franchisees with any information on sales, earnings, or expenses, but if they do, they will provide it in this section of the FDD. There is a significant amount of flexibility and variation when it comes to what franchisors may decide to disclose.
Franchisors must disclose in these sections any fees they will be charging their franchisees, including initial startup fees and any monthly or quarterly royalty payments. We believe this section is incredibly important, so franchisee can enter our used car business opportunity with their eyes wide open.
Estimated Initial Investment
Similar to the above section, franchisors are required to provide prospective franchisees with an estimate of their initial investment, so they have the information they need to make a fully educated decision.
This section is intended to show you what, exactly, the brand history and success looks like for our used car business opportunity. Here, you’ll find three years of audited financial statements, including balance sheets, statements of operations, owner’s equity, and cash flows. Most franchisors create a new business entity when they begin franchising, so the FTC has developed a “phase-in” rule that allows a startup franchisor to provide an unaudited balance sheet in the first year of franchising and an audited one in the second year. This can be useful for getting an accurate idea of the franchisor’s financial status.
Outlets and Franchisee Information
In this section, franchisors will provide a table summarizing the number of franchises that were opened, the number of firings, the number of franchises that were closed, and the number that changed hands in the past three years. Contact information for all franchisees in their system should also be provided, along with the contact information of franchisees that left the system in the past fiscal year.
This is the main action item of the FDD. Here, the franchisor will give you any contracts you will need to sign as part of the startup process. These include the franchise agreement, as well as financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other appropriate contracts.
If you have any questions about the FDD, or what you can expect to find in ours, don’t hesitate to reach out. We want you to have all the answers before embarking on your used car business opportunity.