Tips on Reading a Franchise Disclosure Document: Item 1
As you embark on your journey to franchise ownership, reviewing the Franchise Disclosure Documents (the “FDD”) is one of the most important steps. The FDD summarizes specific sections of the Franchise Agreement and other relevant information in plain English to make it easier to read; nevertheless, it still can be difficult to understand.
An FDD is the window into a franchise organization. Every franchise system is required to have this document and all are identical in how the information is presented to a prospective buyer. Whether you are buying a donut franchise, a pizza franchise or even a travel franchise, it’s a good practice to compare each company’s items side by side to make the best decision. Every franchise company must update their FDD annually. The purpose of the FDD is to provide enough information about the franchisor and the franchise system to assist a prospect in making an informed decision in choosing whether to purchase a franchise.
This is the first of a series that will walk you through the FDD and the 23 items covered by the document.
What is Item 1?
Item 1 is headlined “The franchisor and any parents, predecessors and affiliates.” This item provides a general overview of the opportunity being offered, including a description of the franchise, its competitors and the general market for the products or services offered by franchisees. Importantly, this item also provides information pertaining to the prior business experience of the franchisor, its predecessors and affiliates. Still confused? Here are simplified definitions of parent, predecessor and affiliate. Often overlooked, Item 1 is an important section where you can begin your due diligence.
Parent – An entity that directly or indirectly controls another entity directly. World Travel Holdings is the parent company of CruiseOne.
Predecessor – The previous majority owner of the franchise.
Affiliate – An entity that has common ownership or is under common control with another entity and it may include those that provide products and services to franchisees.
What does this mean to you?
When you join a franchise system, you are not only joining the franchisor but also its parent company. Not to mention, you inherit the reputation of its predecessors. This can be both good and bad; however, the only way to determine is to do your research! Once you receive your FDD, check out Item 1, as you do your due diligence on the franchisor. Google the parent company, predecessors and affiliates to see if there are any skeletons in the closet. Have they, or organizations they are affiliated with, been recognized on any lists or have any lawsuits?
When you join a franchise you are joining a family and it is important to make sure you are comfortable with them. It is important to do your due diligence before making a decision so don’t be afraid to ask questions about the FDD.