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:
- Item 3 - Litigation;
- Item 19 - Earnings Claims;
- 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.