Before you sign an agreement with a franchise company the Federal Trade Commission mandates that they send you a Franchise Disclosure Document (FDD). This is an in-depth document that outlines everything you need to know about the franchise company and your future potential business.
Here are some things to make note of when you review a Franchise Disclosure Document:
- Make note if a trademark is not registered
- Lack of litigation’s filed by franchisee’s claiming fraud or misrepresentation on the part of the franchisor is a good thing
- Understand that the item 19 (earnings claims) may only represent a certain percentage of the franchise system and can contain corporate owned locations
- Take caution if a franchisor is getting major rebates from suppliers that franchisees are obligated to buy from
- Understand and beware of terminology such as “at our discretion” or flexible statements that allow the franchisor to change the agreement for any reason
- Clarify territory promises and the duration of them. Many times territory protection is only for the life of the agreement and has to be re-negotiated when you renew.
- Lack of a large number of closures of units is a good thing
- Beware of franchisors that cannot sustain themselves from royalties and need to rely heavily on new franchise sales