Franchise Articles

Posted on Jan 04, 2011

Items 1-10 of the FDD and how they can help you

Item No.1: The Franchisor and any predecessor:

This section contains the historical background regarding the franchisor, as well as details pertaining to any predecessors. This item includes the corporate and trade names, address and principal place of business.  A description of the franchise should include information such as the nature of the franchise and business experience of the franchisor, including direct experience with franchises.

This item helps gain immediate knowledge about the franchise and offers the prospective franchisee with the information regarding the basic organization history and can help identify the franchisor profile.

Item No.2: Identity and business experience of persons affiliated with the franchisor:

All the names of members of the organization holding down important roles in the operations or in support of the services provided to the business are listed and must be disclosed in this section of the FDD. Information stating the person’s current position in the company, business experience (at least to the last 5 years). Similarly if consulting advice is being taken, the representative or franchise broker’s information is also submitted.

This can often help highlight the franchisor’s credibility and chances of success if they have popular or successful people involved in their teams. Having seasoned and experienced professionals holding down important responsibilities would provide franchisee with the knowledge that the franchisor will be doing sound business for the next couple of years.

Item No.3: Litigation History:

Detailed information regarding the criminal, civil and administrative litigation involving any of the office-bearers, owners, directors or key executives of the company is disclosed in this item. It does however depend that are the allegations or proceedings going to concern the potential franchisee otherwise they may not be included.

Similar to Item No.2, this item helps at validating the business operations and reputation of the franchisor.

Item No.4: Bankruptcy History:

The franchisor must provide information as to whether the company or any of its directors or officers has filed for bankruptcy in the past 15 years. Information on each action must be provided in this section.

This information is highly relevant in today’s time as many companies have survived through bailouts or from incurring high debts and have had records of close bankruptcy otherwise. Prospective franchisees should check whether the company has or its directors have gone into bankruptcy as it would reflect on the organization’s strengths and resilience to the market conditions.

Item No.5: Franchisee’s Initial Franchise Fee and/or Other Initial Payment:

This item states the franchise fee and any other initial payments to be made by the prospective franchisee to the franchisor upon the execution of the franchise agreement. This section discusses the terms of payment and fees, the use of such monies and whether the fees are refundable in whole or in part in the future and under what conditions.

It is very important to know the upfront costs as you need to realize the distribution of your investment and whether the franchise fees are affordable and reasonable. Inflated franchise fees for a sub-standard brand would trigger warning alarms and prospective franchisees can shop from other alternatives depending on the franchisors’ fees.

Item No.6: Other Fees:

All other fees are stated in this item such as royalties, advertizing fees, insurance expenses, training costs, audit and accounting costs, consulting expenses, leases, alteration costs and any other fees which are associated with the franchise.

Previously these expenses were not stated and one of the primary reasons for the creation of the FDD was to safeguard franchisees from unfair fees imposed by franchisors. This part of the document is very important, even more so from the initial franchise fees since it may be that franchisors have lower franchise fees but have excessive royalties and other fees leading to shorter profits for the franchisee. Prospective franchisees must go through this item in detail and identify the important costs and expenses associated with buying the franchise.

Item No.7: Franchisee’s Estimated Initial Investment:

The estimated expenditures associated with the opening of a franchise are calculated with an upper and lower range given for costs to be associated with real estate, construction, equipment, fixtures, permits, furnishings, signage, inventory, working capital, etc. This item also identifies the name of the person(s) to whom payment is made for the preceding aspects and under what terms these costs would be associated (such as buying options or leasing), refunds must also be stated here.

This aids the prospective franchisee identify the necessary capital and realize whether they have enough strength for the entire costs associated with certain franchises. Otherwise they may seek other franchises which allow flexibility with decorations and other costs.

Item No.8: Obligations of franchisee to purchase or lease from designated sources:

Any requirements that the franchisee has to purchase any goods, services, supplies, equipments or insurance for the opening and/or operation of their franchise from a certain designated source must be disclosed. The franchisor must disclose whether they receive any income from the approved suppliers as a result of purchases by the franchisees.

The franchisee can realize whether they must be bound to a certain supplier or have the option of cost savings by identifying their own suppliers and acquiring their own goods and services.

Item No.9: Obligations of franchisee to purchase or lease in accordance with specifications or from approved suppliers:

An extension to the previous item, this section itemizes any responsibility of the franchisee to purchase or lease either from pre-approved suppliers or according to franchisor specifications. Even though specifications for purchases are not included but pricing, discounts and procedures to have suppliers approved by the franchisor are usually noted here.

Provides further information regarding the franchisor domination on the prospective franchisee’s pricings and purchasing models. This item allows franchisees to identify the flexibility available to them and their purchasing options.

Item No.10: Financing Agreements:

Any financing programs available from the franchisor or any of its designates are cited in this section for the benefit of the franchisee.

Financing can help franchisees invest a certain percentage of their own capital while pay certain costs over a long run. They can often get better incentives from the franchisor themselves rather than financing through external sources. This item helps franchisees choose the best financing options available to them.

NEXT POST: Items 11-23 of the FDD and ...

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