But worry not: With the help of some top lawyers, we have taken a specific look at the 23 items in the FDD. Here, we'll stroll you through, describing the significance of each item and directing out prospective red banners.
Item 1
The series company
This is an introduction to the record, possession and business family of the franchisor, such as the types of companies provided. Observe out for: A company conclusion that isn't clear or understandable. If you can't get an precise image of the company here without a lot of attempt, it is likely you will have problems figuring out the relax of the FDD.
Item 2
Business encounter of series executives
Gaining information of the franchisor's authority is essential, because it will help you decide whether you'll experience working with the people engaged. Look for a strong group with encounter in control and franchising. Observe out for: A professional group that is new to franchising or professionals who have been engaged in problems with other companies.
Item 3
Litigation
This item allows you know about any legal cases relating to the company and its fundamentals and administrators. It informs you of prospective statements against the franchisor, as well as whether it has authorized matches against organizations infringing on its images or against franchisees not in conformity with quality requirements (which may be a excellent thing). Observe out for: Several legal cases authorized by franchisees claiming scams or misunderstanding on the aspect of the franchisor. Is there a awaiting category activity lawsuit by franchisees or customers that, if effective, could insolvent the company?
Related: Tips for Finding a Franchise Loan
Item 4
Bankruptcy
This item is hardly ever useful, because your due persistence should have indicated whether the franchisor is in personal bankruptcy. Any official or home who has a personal bankruptcy, or was formerly engaged in a insolvent franchisor, also must be specific.
Items 5, 6 and 7
Initial costs, other costs and preliminary investment
Item 5 is an introduction to the preliminary costs required to start your series. Until the economic downturn, most series costs were not negotiable; however, in the last three decades, some franchisors have provided reduced costs that should be revealed here. If you see preliminary costs specific as a range, ask if you be eligible for a a reduced fee. Item 6 is a graph of other costs, such as royals and marketing costs, which you will be required to pay on an continuous foundation. Bear in mind that not all costs are right here, such as the cost of items and stock. Item 7 sets out the costs and costs required to start and functions your series for the first three months. Observe out for: Franchisees get into problems when they are undercapitalized. Do not believe that the funds specific in Item 7 is adequate to maintain your company, until you start making cash. Ask other franchisees how long it took them to crack even. Go over these items with a cpa before deciding upon a series agreement.
Item 8
Restrictions on resources of items and services
The franchisor has a new in understanding that the goods and solutions you are using or promoting fulfill its requirements. To make sure that, the company may offer you items itself or require you use specific providers. Observe out for: Franchisors who are getting huge discounts from providers. Ask present franchisees if they experience the costs they pay for specific items are reasonable.
Item 9
Franchisee's obligations
This is the single best disclosure you will get: a record of your contract responsibilities, with cross-references to the series agreement. Item 9 allows you to see each responsibility, then go back and study the terminology by which you will live and take in. Observe out for: FDD explanations that are not reliable with the series agreement.
Item 10
Financing
This informs you whether the franchisor provides a loaning program, or whether the franchisor has provides with creditors who have decided to help fund its franchisees. The item also reveals any economical connection the outside loan provider has with the franchisor. Observe out for: Don't ignore that credit from your franchisor is no different than credit from a financial institution, with the same credit circumstances. If you standard the franchisor can cancel your series agreement.
Item 11
Franchisor's assistance, marketing, pcs and training
This item describes the content and opportunity of the franchisor's assistance solutions. It should consist of reports about cash signs up and appropriate details relating to the use of extremely delicate franchisee information to which the franchisor has accessibility. Observe out for: Simple determining terms, such as "at our discretion" or "as required," and know that you cannot depend on getting those solutions. Look properly to see how much of your required marketing costs actually get invested on marketing and how much can be siphoned off into uses that mainly benefit the franchisor. Also observe that if franchisees are not engaged in handling the nationwide marketing fund and program, it can be a significant red banner for traders.
Item 12
Territory
Whether you need a secured area relies on the characteristics of the company. The franchisee of a retail store wants to know that another device cannot start within a certain radius; a company might need five to 10 franchisees in a geographical area. Bear in mind that any territorial security continues only right through your series agreement. The franchisor has the versatility to change it when you replenish your agreement. Observe out for: Retail companies that offer no geographical security.
Items 13 and 14
Trademarks and patents, copyrights and exclusive information
These uncomplicated items record the signature and trademark users the franchisor has acquired. Observe out for: A signature that is not authorized.
Item 15
Obligation to join in the real function of the series business
Franchisors want to be sure franchisees are dedicating full persistence to operating each place. Some companies need franchisees to run the company themselves; others allow them to be inactive entrepreneurs and seek the services of someone else to handle day-to-day functions. Observe out for: Limitations placed on supervisors. For example, do they need to own a discuss of the business?
Item 16
Restrictions on what the franchisee may sell
This item allows you know that you can offer only what the franchisor allows. Observe out for: Franchisors whose item promotions are too restricted.
Item 17
Renewal, cancellations, transfer and argument resolution
This graph provides a conclusion of the series connection to the franchisee, with cross-references to the series agreement, displaying circumstances of cancellations and restoration and revealing where and how conflicts will be resolved. Observe out for: In franchising, you don't have a right to replenish, only a right of first rejection on a new agreement, which may contain higher royalties and other costs. When deciding upon your first agreement, try to perpetuate as many economical circumstances into the restoration agreement as you can. Most conflicts must be resolved in the home town of the franchisor, which places the franchisee at a drawback.
Item 18
Public numbers
This is appropriate only if you are purchasing into the less than 1 % of series techniques that use politicians in their marketing.
Item 19
Financial performance representations
Although this is one of the most essential items of the FDD, only 30 to 40 % of franchisors carry how much their present franchisees are earning; the others must state that they choose not to make such a declare. Observe out for: Income statements depending on business shops, because they pay no royalties and may have different work, lease, item and delivery costs than you will encounter. Also, look out for earnings depending on companies that have been start for five to 10 decades, which may pay reduced leases.
Item 20
Outlets and series information
These maps show the variety of companies started out, moved and shut in the last three decades, which allows you see whether the program is increasing or reducing. The key to the FDD is the record of present and former franchisees. You would be completely careless not to contact as many as possible to get an separate viewpoint on the health of the program. Observe out for: A huge variety of closures, which could mean the company layout is popular out of benefit.
Item 21
Financial statements
These audited fiscal reports let you know if the franchisor is constant. Look at the profit-and-loss declaration first, then the stability piece. You may need a cpa to determine whether the present rate of resources to obligations is positive and how the franchisor records for postponed income. Be sure to study the footnotes. Observe out for: Franchisors who generate most of their cash from series sales. Good franchisors maintain themselves on royalty expenses.
Items 22 and 23
Contracts and receipts
These items consist of the agreements you will be required to indication and the invoice you must indication when you get the FDD. It is essential that you study and understand the agreements and keep duplicates of all records (including the receipt); you'll need them if you ever wish to bring an activity against the franchisor.
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