Before you sign an agreement with a franchise company the Federal Trade Commission mandates that they send you a Franchise Disclosure Agreement (FDD). This is an in-depth document that outlines everything you need to know about the franchise company and your future potential business.
Here are some things to make note of when you review a Franchise Disclosure Document:
- Make note if a trademark is not registered
- Lack of litigation’s filed by franchisee’s claiming fraud or misrepresentation on the part of the franchisor is a good thing
- Understand that the item 19 (earnings claims) may only represent a certain percentage of the franchise system and can contain corporate owned locations
- Take caution if a franchisor is getting major rebates from suppliers that franchisees are obligated to buy from
- Understand and beware of terminology such as “at our discretion” or flexible statements that allow the franchisor to change the agreement for any reason
- Clarify territory promises and the duration of them. Many times territory protection is only for the life of the agreement and has to be re-negotiated when you renew.
- Lack of a large number of closures of units is a good thing
- Beware of franchisors that cannot sustain themselves from royalties and need to rely heavily on new franchise sales
If you’d like to read more about assessing FDDs, here are two article from the Franchise Solutions site: