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5 Things To Watch Out For In An FDD

For a franchisee, success depends on an understanding of and compliance with the Franchise Disclosure Document (FDD). This document may be up to 200 pages long, so it can be challenging to determine which aspects are most important. Here are five critical issues to watch out for in an FDD:

1. What You Control

The FDD will delineate the elements of the franchise that you have complete control over, as opposed to those that are controlled by or require the approval of the franchisor. Franchisor-controlled elements may include much more than branding, products and services. They can extend to record keeping, advertising, vendors and more.

2. Non-compete Clauses

There will be a non-compete clause in the FDD. Understandably, the franchisor wants to protect its business. However, it is important for you to know how you will be restricted if you choose to sell the franchise. Will you be able to own, manage or even work for a similar business afterward? What are the time and geographic limitations?

3. Hidden Expenses

The FDD will list an estimated initial investment, but this may not be the only cost covered in the document. If you look closely, you may find hidden expenses, such as the cost of training or costs associated with upgrading the overall look of the franchise.

4. Your Territory

Running a successful business is difficult enough without having to compete against other branches of the same franchise. The FDD will outline your exclusive territory. Be aware that not all franchises offer exclusive territories.

5. Help From The Franchisor

What can you expect from the Franchisor? Will there be an initial training and ongoing training? Will there be support in creating and distributing promotional materials? Under federal law, a franchisor is not obligated to provide any help beyond that which is listed in the FDD. In other words, if a franchise development director tells you that support will be provided, make certain you get it in writing.

Negotiating The FDD

The franchise development director may explain the FDD to you, but it is in your best interest to have the document reviewed by an independent party. An experienced franchise lawyer can help you understand the document and identify potential issues. Furthermore, many of the items in the document may be negotiable. A lawyer may be able to negotiate more control, less restrictive non-compete terms, larger protected territories and more.

At Heekin, Malin & Wenzel, we have decades of experience helping franchisees set the stage for successful ventures.

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