Reviewing the Franchise Disclosure Document

If you are serious about a particular franchise opportunity,

you will be given a copy of the franchisor's Franchise Disclosure Document (FDD), which contains financial and material information about the franchisor. (The FDD now replaces the Uniform Franchise Offering Circular, or UFOC, which was retired in July 2008.) The Federal Trade Commission (FTC) mandates that franchisors provide a financial disclosure document to all prospective franchisees prior to signing the Franchise Agreement. This document is an integral part in the franchise selection process, as it discloses everything material about the company, both good and bad.

It is highly recommended that you seek professional assistance when reviewing the FDD. It may cost anywhere from a few hundred to several thousand dollars to hire an accountant and attorney to do this, but if you compare this cost to the overall financial investment you are preparing to make, it could very likely pay off if the experts uncover negative information. While an accountant can review the financial statement, a franchise attorney can look for potential clauses that could lead to problems.

Whether or not you seek help reviewing the FDD, there are several things you can do to verify the information contained in the document and uncover potential red flags:

• Substantiating financial statements is important, as the government does not review FDDs to ensure their accuracy; it only requires that franchisors provide the FDD to prospective franchisees.
  
• Franchisors may or make not make straight-forward earnings claims (most often they do not) but will supply information from which you can calculate gross sales. A good way to substantiate earnings claims is to contact existing franchisees and find out their earnings.
  
• Some things to consider when reviewing the FDD include whether it reveals any unusual risks taken by the franchisor and if they have a questionably high litigation record, how its franchise outlets are performing, and how well the company's intellectual rights are protected. If they are not properly protected other businesses could use the same name or logos and open up shop in your area, possibly taking away your business and profiting from the name recognition you paid to use.