Prospective Franchisees Need to Research Further Than FDD for Details

I read an interesting article from Entrepreneur on the Key to Understanding a Company's FDD (franchise disclosure document). It's an article I'd recommend prospective franchisees read but they better be prepared to go deeper if they really want to understand a Company's FDD. The author recommends checking three key sections of the FDD:

  1. Item 3 - Litigation;
  2. Item 19 - Earnings Claims;
  3. Item 20 - Turnover. 

While I agree in principle that these are three key areas of the FDD to understand, the reality is that these areas (particularly the items regarding litigation and earnings claims) often shed little light on the franchise offering. The problem is most FDDs provide very little detail regarding litigation and many franchisors still refuse to make earnings claims although according to the article it appears franchisors are increasingly providing earnings claims at least among the Entrepreneur Franchise 500.

Consequently, if you hope to learn more about the franchise offering you'll need to research further than just the FDD. You'll need to have in depth discussions with management and other franchisees. Come loaded with detailed questions. The FDD should not be your ending point in your research. It is really just the beginning. 

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Comments (1) Read through and enter the discussion with the form at the end
Sean Kelly - January 31, 2014 2:48 PM

Rush:

I think you are spot-on regarding the limitations of FDDs. Add to that fact that very few states are actually even reading them, much less checking for accuracy of contents.

That said, UnhappyFranchisee.Com has featured a number of companies that appear to be and claim to be healthy and growing but their Item 20s told a different story. The key is to add up all the franchises that have been opened within the last three years, then add up all the terminations, closures and (importantly) transfers to determine an estimated failure rate. I recently saw a franchise that was growing in terms of overall units, but Item 20 indicated that their aggressive sales were simply covering up a horrendous # of closures and resales at a loss.

Good article!

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