Understanding The FDD
The Franchise Disclosure Document,commonly referred to as the FDD, is a document outlining an agreement between the Franchisor (us) and the Franchisee (you). Reviewing the Franchise Disclosure Document is when we begin to discuss the terms of our potential franchise relationship.
This time marks the beginning of more serious discussions about deliverables: what you can expect from us as the franchisor and our expectations from you as a franchise owner. It is generally slanted toward protecting the rights and the integrity of the franchise system for the protection of the “brand” as well as the other franchisees. It’s important to remember that a failed franchisee reflects poorly on the entire system. When we enter into a franchise relationship, we are both responsible for our actions as they affect the whole system.
Consumer Protection Document
Franchising is carefully regulated by both state end federal authorities. The Franchise Disclosure Document, as a consumer protection document, is designed to protect you. There are standards established by the Federal Trade Commission (FTC) which outline what should be in the document. Some states require higher standards than others when approving an FDD. Some states do not require an FDD or accept FDD’s approved in other more regulated states. Reviewing this document in detail is the next step along your entrepreneurial path with SHIELD.
FDD Is Not An Application
Reviewing the FDD is your next step in becoming a franchise owner. This document outlines the history of our company and its key personnel, start-up costs, what we deliver and our respective responsibilities.
The Federal Trade Commission (FTC) has established guidelines for the delivery of this information which all franchise companies must provide to prospective franchisees.
FDD’s can be short (manageable) or gangly (hundreds of pages long). Compared to other FDDs, The SHIELD FDD is pretty short and takes a couple of hours to read. It’s important to understand that, with some franchise agreements; the franchisee can be forced to follow some extremely regulated requirements. An example would be the number of stitches per inch and the weight of material used in uniforms. Another consideration is what hard goods the franchisor requires that you purchase from them. SHIELD does not include such standards.
The document is divided into the following sections:
- Disclosure Document – this part correlates directly with the sections of the Franchise Agreement. It is meant to put the terms into “plain English” terms that a layman can understand rather than the “legal” terminology used in contracts.
- Franchise Agreement – This part is the actual “contract” between the franchisor and franchisee. This part defines what a franchisee can expect as deliverables from the franchisor and what the franchisor expects the franchisee to do with their franchise if one is awarded to them.
- Financial Information – This part contains audited financial statements of the franchise company. Audited financial statements indicate that a certified public accountant (CPA) has reviewed the bookkeeping of the franchisor for acceptable accounting practices. These financial statements are limited to one single company. In many cases, the “franchisor” may have other businesses or franchises not represented in the audit. Separating financial statements is a common practice used to protect other assets.
- Addendum – Addendum may contain specific information related to individual states (when one agreement is used unilaterally). Additionally, addendum may contain agreements that deal with licensing of software or other services.
- Receipts – There are two receipts at the end of every FDD. One is the franchisee’s copy, and the other is the franchisor’s copy. There are very specific franchise laws designed to protect potential franchisees from high- pressure sales tactics. When submitting a signed & dated receipt to a franchisor, the franchisee is not bound to move forward. A franchise can not be awarded until after the cooling off period allowing potential franchise owners time to review and evaluate their decision to move forward.
(Not every part of the agreement needs to be enforced, however, without certain guarantees, there would be no way to enforce policies that are designed to protect ALL OF THE FRANCHISEES as well as the franchisor.)
Our Personal Approach To Reviewing The FDD
At this point, we’ve spent some time together and are anxious to enter into more serious discussions about mutual responsibilities. Because legal jargon is often interpreted as severe and uncompromising, it is important that we walk through this document with you so that you have a clear understanding of concepts and terms.
Along with a login code, you will receive a link to download the FDD just prior to our scheduled FDD review call.
FDD Review Call
This document can be extremely intimidating! By reviewing the document with you as a potential franchisee, we can clearly explain why various items are included, and you can understand how to utilize us best as a resource should we move forward together.
During this review call, you can expect a webinar format where you will receive a section-by-section synopsis.
Note: If you plan to engage legal advice to help interpret the FDD. Make sure that the attorney that you deal with has franchise experience. Most attorneys will tell you that they have experience with franchise law or that they can “figure it out.” Before consulting with an attorney to review an FDD, ask them to explain “Item 19.” They should be able to tell you immediately that “Item 19” represents an earnings claim or something similar to that. “Item 19” is the most complicated and most disputed section of the FDD and is commonly not provided by the franchisor.
Please Read Carefully.
You are under no obligation to continue with the next steps in becoming a franchise owner.This information is provided to assist you in evaluating your personal, professional, and financial qualifications as a franchise candidate. As noted, we will review this information with you via phone and answer any other questions that you may have.
After the FDD review call, you will be asked to take some time to review this document in detail. Although you will have a digital copy, we suggest that you take the time to print it.Highlight it….make notes. This will become a working document from which all future conversations flow. It is common for franchisees to request addendum to the FDD during final negotiations before a contract is signed.
At SHIELD, getting to this point means that we have mutually agreed that there is a potential fit. Most of the people that express interest in our franchise concept aren’t qualified and never reach this point. Congratulations on achieving this goal.
We appreciate your commitment to taking a serious look at this business and moving one step closer to joining our brand.
We look forward to more discussions about how SHIELD can help you achieve your professional goals.