You decide to seriously look into buying a franchise. It’s a daunting leap to take, to say the least, but you power through the research of countless franchise companies and business models and finally narrow it down to your top list. What now? Before you sign any papers, you need to do some more digging. This is a huge investment on your part after all. You should know everything about the franchises you’re considering. One essential step in that process is to review the Franchise Disclosure Document in detail. It may not be your ideal Sunday afternoon activity, but it will provide you with the necessary information you’ll need to choose the correct franchise.
What is It?
The FDD is a 23-part document that reviews the franchisor’s history, the company structure, legal history, financial agreements and payment schedules, existing franchisees, and mutual expectations, among many other things. The Federal Trade Commission requires that potential franchisees receive the FDD at least 14 days before signing an agreement. While prospective franchisees are encouraged to review the FDD with an experienced lawyer, this may not be realistic for everyone. Fortunately, franchise companies like Mosquito Joe include a walkthrough of the FDD with a franchise development representative as part of the sales process to ensure you understand the material in the document and have an opportunity to ask any questions.
Why Is the FDD Important?
The FDD is meant to protect potential franchisees by putting everything on the table. Some documents are more transparent than others, but it’s important to painstakingly review each one. This is your chance to dig through any dirty laundry, ask any questions about the franchise, and clear up points you don’t understand, so be diligent! You don’t want something to slip by that might hurt you in the long run!
What Should You Pay Attention To?
Of course, you should thoroughly read each section of the FDD, but there are several items that warrant a little bit more attention. These item numbers are based on the Mosquito Joe FDD and may vary slightly in other company’s documents.
- Item 1 gives a detailed background of the franchise, its company structure, and overview of the industry. This will give you a general idea of how the franchise has grown, what it values, and how it’s organized.
- Items 3 & 4 review any litigation or bankruptcy history the company may have. Any information in these sections should raise a red flag. It could indicate problems with that company’s system, both with the franchisor and the franchisees.
- Items 5-7 outline the franchise fees, initial investment, and other deposits. Perhaps the most important items to prospective owners, this section helps set financial expectations and gives a good idea of how much a particular franchise will cost both upfront and down the road.
- Item 20 provides a list of all current and former franchisees along with details regarding franchise growth and turnover. Asking current franchisees about their experience is one of the most accurate ways to evaluate a franchise. A high turnover rate or lack of growth may be red flags as well.
The FDD can be an intimidating step to owning a franchise, but don’t underestimate its importance. A good Franchise Disclosure Document will give you all the information you need to make a well-informed decision. Remember, Mosquito Joe makes the process a little bit easier by reviewing our FDD with each prospective franchisee in a one-on-one meeting before any contract is signed.
If you think a low investment franchise in a booming industry, with extensive training and support, and great earning potential is right for you, check out the Mosquito Joe franchise website for more information. We’d love to have you on the team as we help make outside fun again!