The 5 Items in Your Franchise Disclosure Document That Can Make or Break a Real Estate Deal
This document helps potential franchisees make informed decisions about investing in the franchise.
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A Franchise Disclosure Document (FDD) provides information about the franchisor, the franchise system and the franchise agreement terms. This legal document must be provided to potential franchisees by the franchisor and read back and forth by potential franchisees — it is recommended that a potential franchisee have a franchise attorney review.
The FDD helps potential franchisees make informed decisions about investing in the franchise. Therefore, all items in the FDD are essential. That said, here's my list of the sections in the FDD that can make or break getting to lease your desired real estate space.
Related: 7 Things Not to Miss in the FDD
Item 1: Business experience
This section provides information about the franchisor's key executives, including their business experience and any bankruptcy or litigation history litigation. Most landlords will ask you for details on not only your background but the franchisors as well. So make sure the franchise you purchase has a good story.
Also, ask to see the franchisor's marketing materials prepared for landlords. These materials should contain the company's success stories, details on the current state of the brand, and information on the growth plans of the brand.
Additional information should include the following:
- Specifics on existing locations.
- High-quality images of existing locations.
- High-quality images of product or food photography
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Item 7: Estimate initial investment
Item 7 covers what the franchisor believes will be your estimated initial investment. This item will be relevant to a landlord since they want to know how much money you will spend on your build-out. Once you share that number, the landlord will want proof of funds.
If the money comes from your savings, your bank account statements will be proof of funds. If the money comes from a loan, you must show at least a pre-approval letter from your bank.
Item 12: Territory
This section provides information about the territory where the franchisee will be allowed to operate the franchise. Some franchisees are particular on territory, while others are not. Having a defined territory is excellent since you have protection and the right to open where others can't.
If you don't have a defined territory, it can be advantageous since you have a larger pool of real estate to search for your location. However, this often means you might compete with other franchisees for the same sites.
Related: The 23 Items Your Franchise Disclosure Document Must Include
Item 17: Initial franchise term, renewal, termination, transfer and dispute resolution.
Many essential elements can be found in Item 17, but I will focus on franchise length and renewal. Regarding the length of your initial franchise, you must pay close attention to ensure your lease mirrors the time you have confirmed rights to the franchise. Signing a lease longer than you control the franchise will be precarious. Remember that your initial franchise period needs to be considered when factoring in your total investment costs. For example, if your total build-out costs are $750,000 and the franchise will only give you the rights for five years, purchasing the franchise may not make sense. You will also want to ensure you have renewal options for the franchise and are comfortable with the renewal options.
Related: How Your Business Can Be Its Own Landlord
Item 19: Financial performance representation
This section is optional, meaning franchisors are not required to provide financial performance information in the FDD. However, if a franchisor chooses to provide financial performance information, they must follow specific guidelines set forth by the Federal Trade Commission (FTC).
The purpose of Item 19 is to help potential franchisees evaluate the potential financial benefits and risks of investing in the franchise system. Suppose a franchisor chooses to include financial performance information in Item 19. In that case, it must provide specific details about the performance of its franchisees, including any average or median sales figures, expenses, profits, or other financial metrics. It's important to note that the financial performance information provided under Item 19 must be based on actual data from the franchisor's franchisees. The franchisor must also clearly explain how the data was collected and any assumptions or limitations that may apply to the data.
Related: 23 Questions to Ask a Franchisor When You Meet Face to Face
Because Item 19 is optional, it's not included in every FDD. However, if financial performance information is provided, it can be a valuable tool for potential franchisees in evaluating the possible return on investment and profitability of the franchise system. Many landlords will ask you to provide details on the average sales of the franchise.
These sales help the landlord decide to lease to your franchise brand. On a side note, it is also important to understand that these sales also help the landlord know what type of rent you could pay. Thus I recommend you keep this information to yourself unless you feel it will help the landlord's decision on picking your brand.
When purchasing a franchise, remember that once you buy the franchise, you must sell the franchise concept to potential landlords. Most landlords think about a use for their center just as much as they factor in terms of the deal. Therefore, if your franchise has a use that landlords do not favor, or it is a brand actively closing stores, it might be difficult for you to secure a real estate location of your choosing.