Opinions expressed by Entrepreneur contributors are their own.
Key Takeaways
Let’s be honest: Few people get excited about reading a Franchise Disclosure Document, or FDD. Still, this legally required document is one of the most important materials you will receive from a prospective franchisor because it gives you transparency into the opportunity you are considering. It is also a contract packed with dense legal language, which is why your attorney should review it carefully and translate what the terms actually mean for you.
Like any contract, the FDD outlines the business relationship you are entering into with the franchisor. Some sections will matter more to certain buyers than others, but there are key areas every prospective franchisee should evaluate with legal guidance. Your attorney can point out potential red flags and explain the advantages and risks, but you should also press the franchisor for clarification on anything that feels unclear until you are comfortable with the answers.
The agreement length
One of the first details to examine is the length of the franchise agreement. The term can signal whether you are entering a stable, predictable relationship or one that may expose you to unwanted changes sooner than expected. I generally favor a longer agreement that can be assigned later over a five- or ten-year deal. Five years can pass quickly, and just as you begin to find your rhythm, you may be forced into a new agreement where any term can change, including the royalty fee.
A longer agreement can benefit both sides. It helps protect the franchisee’s investment while giving the franchisor a more stable system. At United Franchise Group, our brands use agreements that run 25 or even 35 years, and I am glad we are not constantly renewing and renegotiating terms. That said, a long-term commitment should not trap you. Make sure the agreement gives you the ability to transfer or sell the business if you decide to move on.
Brand rules
The agreement should spell out exactly what products are offered and how much freedom you have to change them. A successful brand is going to give you very little freedom, which you should know long before you even get to the FDD stage. You’d be surprised at how many people have tried to “tweak” things that go completely against their franchisor’s brand.
The brand, not the franchisee, determines things like the products you sell. If you buy into a burger chain, you’ll be selling hamburgers, not hot dogs. And if you try to change the main menu, you’re going to have a problem. Your franchisor is selling brand awareness and may have locations all over the world. Customers want and expect the same customer experience at every location.
The same goes for things like service hours, employee uniforms and store design. A 24-hour coffee brand won’t be happy if you decide to close on Sundays, change the store’s colors, or otherwise deviate from the brand profile.
Look at it this way: You’re joining a club. This club says, here’s what we do and here are our rules. Your choice is whether you want to join that club or not. If you want to change it, what’s the point of joining it?
Now, that doesn’t mean a franchisee can’t make suggestions that align with the brand. We get our best ideas from our franchise owners. Talk to your franchisor about what procedures are in place for accepting ideas from franchisees. If having input into the customer experience is important to you, be sure the agreement makes room for that.
Relationships matters
Beyond the legal and financial issues spelled out in the FDD, you are entering a business that’s all about relationships. The FDD goes into a filing cabinet, and we never take it out. In fact, we pray we will never have to use it, which would mean a franchisee relationship has deteriorated so badly we have to resort to legal actions.
To avoid that, we build on our relationships and work with each other personally and help each other grow. If you provide ongoing training and support, maintain honest communication and stay abreast of how each franchisee is operating, you’re a lot less likely to need to pull the document out of the drawer.
Like any other brand, we have occasionally had a store owner depart from policies clearly spelled out by the FDD. But I don’t think we’ve ever handled it by saying, “Well, look here. According to page three, paragraph four, you’re supposed to do this or that.” Instead, we might say, “Here’s how many of our best store owners do this. We have a proven way of doing things, but you’re not following the program. Is there a reason? What’s stopping you?”
We do a lot of things that go beyond the scope of the franchise agreement while making sure everyone adheres to the formal contract. The FDD is just one of many tools that both sides use to assess each other. Talking to other franchisees is also essential for the would-be franchisee.
At the end of the day, the FDD is an irreplaceable part of the franchise process. Understanding it (with an attorney’s guidance) can help you learn whether you and the brand are a good fit.
Key Takeaways
Let’s face it. There’s nothing fun or entertaining about a Financial Disclosure Document (FDD), which your prospective franchisor is legally required to provide, so you will have full transparency into the deal you’re considering. It’s a contract, with page after page of dry, densely composed legal language for your attorney to wade through and explain.
Like all contracts, the FDD is a roadmap to the kind of business relationship you will have with your franchisor. Different areas are important to different people, but there are some critical concerns to look for with your attorney. They can identify potential red flags and explain the pros and cons, but it’s up to you to ask the franchisor to clarify any provisions or questions until you’re satisfied with the answers.
The agreement length
The length of the agreement can tell you whether you’ll have a stable, predictable relationship or may have to deal with unexpected, unwanted changes. I lean towards a longer franchise agreement that’s assignable down the road, rather than a five- or ten-year agreement. Five years go very quickly; just as you’re getting your footing, it’s time for a new agreement with any or every item changed, including a higher royalty fee.
