An important step in evaluating any franchise opportunity is a review of the Franchise Disclosure Document (FDD). By the time you receive this document, you’ve probably had a conversation or two with a representative from the brand and just as you begin to develop a picture of your life as a franchisee, a 200 page legal document is dropped in your lap. “Here’s this, have fun.”
Hopefully the brand representative did a better job of explaining this federally mandated document before giving it to you, but assuming they didn’t, let’s review that here. In order to understand this critical document and its purpose in your due diligence process, it is important to first understand where it came from and its intent.
Back in the early “wild, wild, west” days of franchising, there were no laws governing disclosure and, as such, exploitation ran rampant. Fraudulent scams disguised as franchise opportunities were sold in high pressure sales environments where unwitting investors often lost their life savings. Recognizing the need to protect the consumer, the Federal Trade Commission (FTC) stepped in in 1979 and passed the first franchise disclosure law, known as the Franchise Rule.
While updates and changes have been made to the Franchise Rule since then, the basic requirement of disclosure remains in place. Today, the FTC mandates that all franchisors disclose a potential franchise buyer with a standardized, 23-item document that includes the relevant information a buyer would need to make a decision about the opportunity. The FTC also mandates a 14-day review period that begins once the document has been received by the potential buyer, during which no agreements can be signed or monies can be exchanged.
A thorough review of the FDD is a crucial step in your due diligence process. With a keen eye, reading the document should paint a clear picture of what you can expect from your franchisor and what the franchisor may expect from you. In addition to your own personal review, you may also want to consult a franchise lawyer and make sure that any questions that come up are answered by the franchisor.
While all 23 items in the FDD contain vital information, here is a summary of points of interest to which you may want to pay particularly close attention:
Item 5: Initial Fees
Initial fees are typically straight-forward and non-negotiable. While there may be discounts available in specific instances (veteran discounts are fairly common, for example) the initial fee is the “cost of entry” and provides access to the brand’s trademarks, operating systems, training, support and network.
Item 6: Other Fees
These fees are often pooled costs of doing business and generally cannot be avoided. While fees can vary from one franchise to another, some are more common than others. Royalty fees, marketing fees, technology fees, transfer fees and renewal fees are all very common, but can vary greatly in amount. As you review the fees, consider perceived value and discuss with other franchisees during the validation process. Do the fees make sense? Are any of them out of line? What latitude does the franchisor allow itself to make in term increases or decreases?
Item 7: Estimated Initial Investment
Here you will see a detailed breakdown of investment ranges, including initial fees, operating expenses and working capital. It is important to note that some FDDs are intentionally broad about investment costs, especially if there are different operating arrangements available. An owner-operator franchisee, for example, may see lower initial operating expenses than someone who plans manage from afar and install a management team from day one. For a detailed look at U.S. Lawns investment costs, visit our Franchise Start-Up Costs page.
Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training
This item details the assistance the franchisor is contractually obligated to provide. Keep in mind, the franchisor may go well above and beyond what is outlined in Item 11 in terms of support to its franchisees, but any promises of support not detailed in this item should be validated with other franchisees in your conversations.
When it comes to training, pay particular attention to the depth of the training team and the years of experience in instruction.
Item 19: Financial Performance Representations
This particular item is optional to disclose, and not all franchisors choose to include it. If it is excluded, ask yourself why. What is included and how the information is presented can also vary greatly from one franchise to another. Some choose to focus solely on top line revenue, while others will show more detail regarding costs and profitability. A strong Item 19 will also breakdown averages at different phases of the business growth in addition to providing an overall network average. Use this information to determine if the opportunity will meet your expectations in both the short and long term. Get a sneak peek at U.S. Lawns Item 19 by visiting our Franchising ROI page.
List of Existing Franchisees
The most valuable source of information about any franchise system is existing franchisees. Use this list for validation purposes. Plan to call several franchisees and, if possible, visit them in their businesses. Try to speak to established franchisees, as well as those newer to the brand to get an idea of both short and long term satisfaction. Understand that every franchise will have its detractors, but your goal is to get a sense of the prevailing attitude of the group. Are most of the franchisees positive and happy about the decision they made? When speaking to an unhappy franchisee, listen to their complaints, but also determine what makes this franchisee different from the rest and whether theirs is an isolated case.
Making the decision to join a franchise is not a decision to be taken lightly. Remember, while intimidating in size and scope, the FDD is there to help you understand the opportunity in front of you and make a reasonable comparison to other opportunities you may be evaluating.
When it comes down to it, investing in a franchise is not just about making money, it’s about creating a lifestyle that will give you and your family what you are looking for in life. Alignment is critical and you need to make sure the brand shares your personal goals and values.
If you’d like to review the U.S. Lawns Franchise Disclosure Document, begin by completing the Request for More Information.