Don't Sign a Franchise Disclosure Document Without Reading these Three Line Items

The franchise industry is booming right now, and people are flocking to buy into these up-and-coming businesses in droves. However, while franchising may seem like an easy way to make money, it’s important to take into account the number of risks involved in becoming a franchisee before you make your final decision.?

If you’re considering buying into a new franchise, review these three important line items in the Franchise Disclosure Document (FDD) before you commit to becoming a franchisee. They’ll help ensure that you get out what you put in!

But first, let’s clearly define the meaning of an FDD.?

What is an FDD?

The Franchise Disclosure Agreement (FDD) is a document that's provided by a franchisor to a prospective franchisee.?

It contains important information about the franchise, including the franchisor's business model, how much it will cost to get started, and what the ongoing fees will be. It also includes an extensive list of things you should know before signing on the dotted line.

The Three Line Items to Consider in an FDD

There are several items to look at in the FDD when considering a new franchise, but some are more crucial than others. BidVita recommends paying more attention to the initial investment, the franchisor’s assistance, and the financial performance representation.?

Let’s take a closer look at why it is important to review these three items.

Initial Investment

When you're looking at a Franchise Disclosure Agreement (FDD), the initial investment is one of the key line items to consider. This is the money you'll need to get started with the franchise, and it's important to make sure that you have a clear understanding of what's included in this number.?

Most often, the total includes some combination of training; license fees; startup supplies; start-up inventory; goodwill purchase or lease fee; building leasehold improvements, or build-out costs. Initial investments can vary widely depending on which franchise you are considering as well as your location and demographics.

Franchisor's Assistance

The Franchisor's assistance is another key line item to consider in an FDD. This section of the FDD describes all the services the franchisor is obligated to provide to the franchisee. It is important because the franchisor's assistance can help you get your business up and running quickly and smoothly.?

Furthermore, the franchisor's assistance can also help you troubleshoot any problems that may arise. Also, the franchisor's assistance can also help you expand your business in the future.

Financial Performance Representations?

Under the financial performance representation, the franchisor is allowed, but not mandated, to provide details on each unit’s financial performance. This information can give you a good idea of how well the franchise has performed in the past and how much money you can expect to make as a franchisee.

While it isn’t a guarantee, it does provide you with some insight into whether or not this opportunity might be right for you. So, even if a franchisor doesn’t provide it, you can always ask them for it.

Conclusion

When you're considering becoming a franchisee, it's important to do your due diligence and read the Franchise Disclosure Agreement (FDD) thoroughly. Look out for the initial investment, the franchisor’s assistance, and the financial performance representation. By understanding these three line items, you'll be in a much better position to make an informed decision about whether or not becoming a franchisee is right for you.