If you’re considering a franchise, it can be difficult to know where to start––especially when you’re handed documents you’re not familiar with.
When it comes to specific documents all prospective franchisees will work one way or another, The Franchise Disclosure Document (FDD) is one of the most important since it holds just about everything there is to know about the franchise.
In short, the better you understand what’s inside the FDD, the better prepared for everything that comes next. While no franchise can guarantee wild success, knowing what to look for in these documents allows to make a smarter, more complete assessment of the opportunity by using all the resources at your disposal.
Before diving into the key items in the Franchise Disclosure Document, it’s important to note that much of what’s included in this document deals with financial figures and other numbers. If this isn’t your cup of tea, getting the help of an accountant to review these figures with you can be a huge advantage as any experienced advisor can point out potential hazards and make complex figures simpler to understand.
With that in mind, we’ve highlighted five of the 23 items in the FDD of most importance. Keep in mind that while these are the key items, that doesn’t mean the others aren’t important. Take the time to review your FDD fully and talk through any questions you have with the franchisor.
#1: The Initial Franchise Fee (Item 5)
What does it cover?
Item 5 covers two things:
- 1. The costs a new franchisee incurs before they can open their business, and
- 2. Whether or not any of those fees are refundable along with requirements and conditions of a refund
Tips & Advice:
It’s important to remember that as a new franchisee, you will need to pay the initial fee before opening the business so don’t assume you’ll be able to use profits from the franchise to cover those costs––you’ll need to pay it upfront.
Secondly, it’s important to note that these are not the only costs you’ll need to pay; Item 5 only covers fixed costs.
#2: Other Fees and Expenses (Item 6)
What does it cover?
Item 6 is designed to help franchisees do three things:
- 1. Understand the capital requirements for operating a franchise under the brand,
- 2. Get a clear picture of any recurring or occasional costs during the initial term of the agreement, and
- 3. Understand what, if any, advertising or purchasing cooperatives the franchisor is participating in
While the first two points are self-explanatory, the third warrants a better explanation:
Some franchisors work with third parties to help with advertising and other parts of the business. Item 6 lets franchisees know how much freedom they’ll have to purchase goods for the business and advertise on their own.
For a more detailed explanation of initial franchise fees versus ongoing fees, check out our other post: Initial Franchise Fees Versus Ongoing Franchise Fees.
Tips & Advice:
Remember, although Items 5 and 6 give you vital information regarding costs and fees, they might not paint a complete picture of the costs you’ll incur as you get started. Speak with your franchisor and current franchisees about any other costs or expenses new franchisees typically face as they get their business off the ground.
#3. Territory (Item 12)
What does it cover?
Item 12 outlines franchisees’ rights over territory and any restrictions that come with it. While much of this section is laid out in clear terms, the most important part of Item 12 concerns protected or exclusive territories.
Tips & Advice:
Protected or exclusive franchise territories mean it’s impossible for another franchisee to establish another location within a certain distance of you. Territory restrictions can either hurt or help you, depending on what type of business you want to open. For example, two of the same clothing stores with the same merchandise within a 2-mile radius will drag down sales for both stores, while two car washes with excellent reputations supporting one another may capitalize on all of a community’s business.
Here at The Groutsmith, we believe exclusivity is important to our owners’ success, which is why we offer large protected territories to all Groutsmith franchisees.
#4: Financial Performance Representations (Item 19)
What does it cover?
Item 19 isn’t required of franchisors to disclose, but for those that do, it will give earnings information to help you get a feel for how much you stand to make with the business. However, be cautious of any franchisor listing corporate store earnings or only well-established franchises. This data may not help you determine how well you will fare since their terms will be much different than yours.
Tips & Advice:
Be sure to ask existing franchisees about the accuracy of these figures to ensure your franchisors is being honest about how much you can expect to make.
#5: Financial Statements (Item 21)
What does it cover?
Item 21 covers the financial statements for the franchisor. Specifically, you’ll find balance and income statements that cover the past few years.
The purpose of Item 21 is pretty clear––it’s there to give you, the prospect a clear idea of the franchisor’s solvency. Keep in mind that these are not financial statements from franchisees––they’re audited financial statements from the franchisor itself.
Tips & Advice:
If you don’t have a solid understanding of finance or you aren’t sure what you’re looking at, this is an Item you might want to look over with an accountant or financial advisor.
Here at The Groutsmith, we work one-on-one with all prospective buyers to ensure every detail of the opportunity is clearly laid out and all concerns are addressed. Unlike many other franchises, we believe complete transparency is crucially important throughout the entire onboarding process.
Interested in a low-cost franchise opportunity offering low startup costs and minimal monthly overhead? Click here to learn why The Groutsmith stands out as the leader in grout and tile cleaning, repair and restoration. Want to connect with us one-on-one to get started? Contact us today.
Looking to learn what it’s like to own a Groutsmith franchise? Get a first-hand look from eight franchisees in our free Q&A guide. Click below to download.
