First-timer Dives Into a FDD
The latest issue of Franchise Times has a new recurring feature by our delightful and tireless reporter Julie Bennett, where she examines a franchisor’s financial disclosure document—the all-powerful FDD—in search of strengths and potential red flags. Tooting our own horn, this is one of the best reader services we can provide. It inspired me to dive into an FDD on my own for a firsthand look at what this document contains for nervous first-time franchisees.
Julie’s “Analyze This” picks a specific brand and goes through the various parts of the FDD (listed as Item 1, Item 2, etc…), and she looks at specific items that are important to know or worrisome from an investor’s perspective. For my first examination, I picked a brand we recently interviewed for a story. I opened up the PDF and hit “print” before perusing. I was shocked when I picked up a 300-page stack from the printer.
Three hundred pages?! "You’ve gotta be kidding me," I thought—reconsidering this self-imposed assignment that now seemed like a hulking task. Sitting on my couch with a political convention on in the background, I poured myself a whiskey on the rocks and sat down with the FDD, highlighter and a pen.
From my experience as a reporter, and what I’ve learned from Julie’s reporting, I searched for a few very important tidbits right off the bat: history of the company’s founder, description of its full range of services, litigation that the company is involved with, the estimated initial investment and recurring fees and—most importantly—the Item 19, which covers financial performance representations.
While this document seemed intimidating at first—and there were sections that went over my head—I scribbled down basic questions next to anything that was confusing. Generally, most sections were written in plain English.
This particular franchise mentioned that its territories were not exclusive. What? That would warrant further analysis for any potential franchisee. I also noted specific language prohibiting the operation of other businesses out of the home where this company (that requires no storefront) would be located. That could be a big deal breaker for some entrepreneurs.
As predicted by Julie, the best stuff lives in Item 19—the brass tacks. It was interesting to see both average and median revenues for the total pool of franchisees, as well as a breakout for the top-performing third. There’s some real money to be made here, which is good given the endless number of fees and other ways the franchisor receives kickbacks from individual operators.
It was also interesting to see how many franchisees have come into and left the company over the years, as well as the details on how a franchisee gets out of the system if things don’t work out. That would clearly require the trained eye of a lawyer.
Two and a half hours in and only a couple cocktails later (I earned them), I felt like I was starting to get the hang of this. Like anything, what appears daunting from a distance is easier when tackled in chunks.
Should I find myself in the position to start a franchise someday, which is at least remotely possible being in this industry, I know enough to realize when I need the opinion of an expert—a lawyer, consultant, accountant or current franchisee—and enough to ask some educated questions of my own.
When I reached daunting parts that were over my head, I pictured what it would be like for somebody who is NOT a franchise reporter by trade. Accounting and legal statements will never be a walk in the park, but it’s good to know there are people out there who can help. If you make friends in the industry, it’s possible some might not even charge you for their expertise. Networking is so important.
In the meantime, I’m grateful for Julie’s new “Analyze This” column, and look forward to reading more of them in future issues of Franchise Times. I’ve been a reporter long enough to know some real doozies can be hidden in the fine print, but it’s out in the open in the FDD. As my favorite high school teacher used to say, “think for yourself and question authority.”