Using the FDD to Evaluate Franchise Ownership

When you're exploring franchise business ownership, there is a legal document called the Franchise Disclosure Document (FDD), and it's really a very important document. We suggest that you have an attorney look at it, but there are a couple of things that I always point my clients to in looking at that document.

The Power of Item 19

Item 19 in the Franchise Disclosure Document (FDD) provides a clear snapshot of the franchise's financial potential, giving you valuable insights into earnings, expenses, and other key financial details. This section is designed to help you assess the financial viability of the franchise you’re considering.

What makes this particularly powerful is that you can take the figures from Item 19—such as average sales, costs, and profit margins—and then directly reach out to current franchisees for their honest feedback. You can ask questions like, “Does this financial picture align with your experience?” and “Are these figures accurate based on your real-world operation?” Franchisees are often more than willing to share their experiences, giving you an inside look into what running the business is really like.

This level of transparency and access to firsthand insights is one of franchising's unique advantages. In no other business model can you directly connect with others already operating the business and get a candid, unfiltered perspective on what it takes to succeed. It's an invaluable resource that helps you make an informed decision about whether the franchise opportunity is a good match for your goals, lifestyle, and financial expectations.

?Learning from Experience

Speaking directly with existing franchisees is one of the most critical steps when exploring a franchise opportunity. I encourage my clients to reach out to at least ten franchisees. This may sound time-consuming, but if you spend just 30 minutes per call, it totals only five hours—a small investment of time compared to the significant investment you're considering. Sadly, many potential franchisees skip this step, missing the opportunity to gain insights that can help determine if the business is the right fit.

Why Speak to Franchisees?

When you talk to franchisees, you gain real-world perspectives beyond marketing materials or Franchise Disclosure Documents (FDD). You can learn about the challenges they’ve faced, the support they’ve received from the franchisor, and whether the business has lived up to its promises. I recommend speaking to franchisees at various stages of business ownership—one year, five years, and ten years—to get a broad view of the experience.

• The 1-Year Franchisee: They’re still navigating the learning curve and can share insights into the startup process, initial struggles, and what they wish they had done differently.
• The 5-Year Franchisee: This franchisee has learned to sustain the business over time and can give you insights into what it takes to maintain profitability, adapt to changes, and handle challenges that arise as the business grows.
• The 10-Year Franchisee: They offer a long-term perspective on the franchise. They’ve weathered economic shifts and changes in the market, and they can provide you with a clear picture of the potential longevity and rewards of the business.

Speak with Franchisees at Different Levels of Success

It’s also important to talk to franchisees performing at different levels. Speak with someone who is thriving—someone who is "knocking it out of the park"—to understand the potential upside of the business. On the other hand, speaking with those who are struggling or simply average can help you see the challenges you might face and what could cause performance to dip.

You get a well-rounded view of the opportunity by speaking to franchisees at various stages and success levels. These conversations will help you determine whether the business is right for you, not just in terms of financial success, but lifestyle, work-life balance, and alignment with your personal goals.

Closing the Gaps with Diverse Feedback

After speaking to the top performers and the struggling franchisees, I recommend randomly selecting four more franchisees to get additional perspectives. These conversations will help you gain a complete picture of the franchise's positive and negative potential. I'll provide you with a set of questions to ask to guide the conversation, but you’ll likely come up with your own based on your specific interests.

The Value of These Conversations

By spending a few hours speaking to franchisees, you'll gain insights that can’t be found in the FDD. You’ll hear firsthand about the franchise’s culture, the franchisor’s support, and the true costs and benefits of ownership. These conversations will give you the confidence to decide whether this franchise is a good fit for you.

Maximizing Your Research

When considering franchise ownership, asking the right questions is critical to gaining a full understanding of what’s involved. One of the first questions you should ask is, "Would you do it again?" This simple but powerful question can reveal how satisfied the franchisee is with their decision. It can help you understand whether the rewards outweigh the challenges, giving you a clearer picture of the business’s long-term viability.

Another essential question is: "Does the franchisor provide the kind of support they claim to?" The Franchise Disclosure Document (FDD) will outline the support the franchisor promises to provide, but it’s always best to hear firsthand from franchisees. They can tell you if the franchisor’s support is as strong and reliable as promised or if there’s a gap between what’s promised and what’s delivered.

Additionally, you should ask: "What mistakes did you make in your first year that you wish you hadn't?" Every new business owner makes mistakes, and franchisees are the same. The advantage is that you can learn from their experiences to avoid the same pitfalls. These insights can be crucial to navigating the early days of your franchise journey.

Finally, ask: "What are you doing now that has contributed to your success?" By understanding the actions and strategies that have led to their success, you can identify practices that might work well for you as you grow your franchise.

The incredible thing about franchising is that it’s one of the only business models where you can directly ask current owners about their experiences and learn from their successes and mistakes. You can use this knowledge to create a roadmap for success, minimizing your chances of stumbling where others have before you.

If you’d like to know more about franchise opportunities and ownership, please get in touch. I am uniquely qualified to match your potential with the possibilities that come from small business ownership through franchising. All you have to do is allow me to be your guide. My no-cost, no-obligation consultations have helped many entrepreneurs in Cleveland, Akron, and Canton secure a future that belongs to them and them alone. If you’d like to start your entrepreneurial journey, I would love to introduce you to a new world of possibilities through franchise ownership.https://calendly.com/tmcgroarty/30min