Navigate the Paper Trail

The FDD is a mother lode of investor information, designed to give prospective franchisees all the information relevant to the franchise offering. The FDD contains the facts that state and federal regulators consider important to your decision regarding whether to buy the franchise. The FDD is designed to protect you, the investor, and you'll find it enormously helpful.

The document is made up of three basic sections sandwiched together: first, 23 sections describing various aspects of the franchise program; second, a set of the franchiser's audited financial statements; and third, a copy of each form or contract you'll sign if you buy the franchise.

State and federal franchise laws require that a franchisor deliver a copy of this document to you at the first personal face-to-face meeting with you or 10 business days before the contract is signed or money is paid, whichever happens first. This means you may not receive an FDD simply by requesting it (although some franchisors will send one on request), but you should certainly receive a copy well before you're asked to pay money or sign a binding contract. Ask the franchisor for an FDD early in your investigation; it may save you a great deal of time.

The first fundamental mistake most franchise investors make is to put the FDD aside and not bother reading it. Sure, it can be a bit intimidating--some FDD documents are thick, bound minibooks--but they're not impenetrable. If you understand what you're looking for--the red flags that should alert you to investigate the business further--and focus on the key investment information, the FDD is an extremely useful introduction to the franchise program you're considering.