Your Guide to Understanding a Franchise Disclosure Document (FDD)

If you're thinking about buying a franchise, you should know that one of the most important steps to ownership is understanding the franchise disclosure document (FDD). This in-depth document gives you all the key details about the franchise you’re interested in—like its financial info, the fees you’ll owe, and the franchisor's history—so you can make a well-informed decision. Not only that, but the franchise disclosure document (otherwise known as an FDD) ensures transparency and helps protect you throughout the franchise-buying process. 

Clearly, this is an important document, but it can be a lot to digest if you don’t have experience reviewing one. If you’re preparing to dive into an FDD and are looking for a little extra guidance, we’ve outlined all of the information you’ll need to successfully evaluate a franchise agreement.

What is a franchise disclosure document? 

A franchise disclosure document is a legal document that franchisors must provide to every potential franchisee. In fact, providing an FDD is required by the Federal Trade Commission (FTC) in the United States, because they protect franchisees and ensure that they receive all the information they need before entering into a franchise agreement: a comprehensive overview of the franchise, detailed information on the franchisor's history, fees, legal obligations, and the financial performance of other existing franchisees. 

Important items in a franchise disclosure document

We’ve touched on it briefly, but what exactly can you expect to find in a franchise disclosure document? Because they’re federally regulated and mandated, FDDs follow a standard structure with 23 sections, covering:

• The franchisor’s background and business experience, including a detailed history of both the franchising company and any key executives
• Financial information, which offers insights into the financial health of the franchise and includes earnings claims and financial statements
• Fees and initial investment required to start and operate the franchise, including upfront fees and ongoing royalties
• Franchisee obligations, from operational requirements to adherence to the brand’s standards
• Territory rights, defining the geographical area where the franchisee can operate
• Trademarks and patents or any other intellectual property owned by the franchisor and the rights granted to the franchisee
• Any restrictions on sales for the products or services the franchisee can offer
• Information on renewal, termination, and dispute resolution between the franchisor and franchisee 

What a franchise disclosure agreement won't tell you 

Clearly, there’s a lot of valuable information in a franchise disclosure document, which will help you to evaluate the potential risks and benefits of joining a franchise. At the same time, an FDD won’t cover everything. For instance, it won’t give you insights into the day-to-day operations of the business—how it really feels to run that franchise on a daily basis. An FDD also won’t cover local market conditions in the area you plan on operating in, which can significantly impact your franchise's success. As an example, imagine you’re interested in operating a tutoring franchise. While this company might be doing well nationally, you likely wouldn’t see those kinds of results if you chose to open a location in an area with older demographics. 

And it goes without saying that an FDD won’t be able to account for any personal attributes that could make or break your business. All it can tell you is about the franchisor itself, not about whether your specific skills, experience, and lifestyle are in line with what it takes to open a successful franchise.

How to read a franchise disclosure document

We mentioned that an FDD is a hefty document, often between 200-300 pages long. There’s a lot of information contained in there, and you’ll need to read it carefully before making any commitments, ensuring that both you and the franchisor are clear on your responsibilities and the nature of the partnership.

When you receive the FDD, you’ll begin a (legally required) 14-day review period to give you enough time to carefully examine the FDD and fully understand the terms, obligations, and expectations outlined. To make the most of your franchise disclosure document review, start by setting aside ample time to read and digest each individual section (remember, there are a lot!). Take notes as you go, jotting down any questions or concerns that arise. You can reach out to the franchisor for more information on any of these points you’ve written down.

And while you’re in this review process, you might also want to take the time to compare FDDs from different franchisors to evaluate their offerings and find the best fit for you. 

Don’t be afraid to engage with the franchisor!

During the entire review period, you’re able to engage directly with the franchisor at any point. Take advantage of this time and ask any questions that help clarify any uncertainties and deepen your understanding of the business. You might also want to take this a step further and use this time to also learn about some of the franchisor's support systems, financial performance, and the experiences of current franchisees. 

Speaking with the franchisor is also an opportunity to uncover red flags before you sign any agreement. Keep an eye out for vague answers, a reluctance to provide information, or pressure to sign quickly. Any of these should indicate to you that this franchisor is less than trustworthy and may not be the best choice to go into business with.

There’s always the option to seek professional guidance during the review

A franchise disclosure document is a massive file, and reviewing it on your own can be intimidating. Not only that, but reading the FDD is also one of the last things you do before investing a significant amount of time and money into a business. For these reasons, we often recommend that potential franchisees get professional help. A legal review by a franchise attorney ensures that you understand all the legal nuances and are aware of any potential risks, and it gives you peace of mind before you take the next big step in your entrepreneurship journey.  Consulting a franchise attorney or a consultant can also provide insights that might not be immediately obvious to an untrained eye, helping to protect your interests and ensure clarity in your investment.

What’s next after your FDD review?

Once you’ve thoroughly reviewed the FDD, the next steps involve follow-up discussions with the franchisor to clarify any remaining questions that you might have and to ask about any specific areas of interest. You should also do some additional due diligence, like speaking with current franchisees and researching your local market conditions. After gathering all the information and addressing any concerns, you’ll be ready to make your final decision about whether to move forward with the franchise opportunity!

Get ready to evaluate a franchise agreement

For anyone considering investing in a franchise, the franchise disclosure document is a crucial—and required!—part of the evaluation process. Its detailed insights into the franchisor, its financial performance, and legal obligations provide you with all the essential information to make an informed decision about a given franchise opportunity.

Have questions about your FDD? Need help navigating it? Don't hesitate to reach out to the Spherion franchising team! They’re available to support you during the entire FDD review process so you have the clarity you need to move forward confidently.