How to Buy a Franchise Business | Free Udemy Course

How to Find, Finance & Buy a Franchise Introduction

Franchise Terminology 101

Overview of Franchise Financing

If you’re looking to finance your franchise business, you may be aware that your needs will be different than many other business owners. Generally, due to the process required to buy and start a franchise, you’ll need a greater upfront investment to cover fees and resources, as well as an ongoing investment of capital to actually run the business.

In this guide, we’ll break down the best franchise finance options and how to apply once you’ve decided on the right financing solution for you.

Let’s get started.

The Best Franchise Loans

If you’re looking to finance your franchise, there are a variety of lenders and funding solutions that may be able to help. However, considering the unique nature of starting a franchise, and the costs that can be associated, you may choose to start your search with financing options and lenders that have experience working with franchise businesses.

This being said, although traditional bank loans will offer the most desirable rates and terms for your franchise financing, it’s generally harder to qualify for these business loans. Therefore, you’ll find that overall, the best franchise loans are SBA loans or loans from alternative lenders. With either of these options, you’ll find convenient and accessible financing, that you can use to support a number of different purchases within your franchise business operations.

Let’s learn more.

401(k) Business Financing

401(k) business financing, also known as Rollovers for Business Startups (ROBS), is a small business and franchise funding method. ROBS allows you to draw money from your retirement account in order to start or buy a business without incurring an early withdrawal fee or tax penalty. This is not a loan — ROBS gives you access to your own money so you can build the life you want without going into debt.

No Interest, No Collateral, No Credit Score

401(k) business financing is an ideal method if you don’t want to go into debt, don’t qualify for a loan, or just don’t have the cash on hand to start or purchase a business. Unlike other types of funding methods, your credit score, past experience, or on hand collateral play no role in eligibility. Instead, the main factors are the type of retirement account (like a 401(k) or IRA) and the amount of money you have in it (at least $50,000).

You Can Still Grow Your Nest Egg

ROBS is also a tool for building your retirement assets. While using ROBS does mean you’re taking money out of your retirement accounts, it also means putting cash back in. As you work within your business and pay yourself a salary, you’ll also be contributing a percentage of that salary into a 401(k), just like you do when you’re an employee at any other company. This means your retirement assets will continue to grow as you build your business.

Fully Legal and IRS Compliant

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to shift the burden of building retirement assets from the employer to the employee. ERISA, when paired with specific sections of the Internal Revenue Code, makes it legal to tap into your eligible retirement accounts without an early withdrawal fee (if you’re younger than 59 and a half) or a tax penalty.

SBA Loans

First, because the SBA makes funding more accessible for small business owners, SBA loans will be one of your top options for franchise financing.

This being said, however, it’s important to note that although 10% of all SBA loans go toward franchise financing, in order to qualify for SBA financing, the SBA must approve your franchise and list it on their Franchise Directory.

If your franchise isn’t in this directory, you’re not eligible for an SBA loan to fund this business. To get your franchise into the directory (if it isn’t already), the franchisor has to submit its franchise disclosure document (FDD) to the SBA for review. The FDD outlines the history, financials, marketing strategies, and other information about the franchise. Once your franchise is approved and listed on the directory, you’ll be eligible (at least in this respect) to apply for franchise financing from the SBA.

With this in mind, out of the various SBA loan programs, both the 7(a) loan program and the CDC/504 program are great options for franchise businesses.

SBA 7(a) Loans

To start, the SBA 7(a) loan program is the most popular SBA loan program and a great option for franchise finance.

As we mentioned above, SBA loans are particularly worthwhile for business owners who can’t qualify for traditional bank loans.

With an SBA 7(a) loan, you can fund essentially any purpose—working capital, equipment, inventory, and more. This being said, however, it’s important to note that SBA 7(a) loans cannot finance ongoing franchise or royalty fees.

Amounts on these loans range up to $5 million with terms from 10 to 25 years. Interest rates on SBA 7(a) loans are ultimately determined by the bank lender you work with, however, the SBA sets maximum rates—and your interest rate will typically fall between 7% and 9.5%.

In order to qualify for franchise financing in the form of an SBA 7(a) loan, you’ll need to have a good credit score, solid business financials, and (usually) at least two years in business. Compared to franchise loans from alternative lenders, it will be more difficult and time-consuming to qualify for an SBA loan, however, these loans will offer the most desirable rates and terms (second only to traditional banks).

Therefore, if you’re looking for a flexible solution for franchise financing, you’ll want to consider an SBA 7(a) loan as one of your best options.

SBA 504/CDC Loans

The next franchise finance solution you’ll want to consider is an SBA 504/CDC loan.

Unlike the 7(a) loan, SBA 504/CDC loans must be used for very specific purposes—such as purchasing or renovating fixed assets like real estate or equipment.

SBA 504/CDC loans can range in amounts of up to $20 million, with terms from 10 to 25 years. In addition to their specific purpose, SBA 504 loans are also different from SBA 7(a) loans in the way that they work. Whereas 7(a) loans are provided by an SBA partner, most often a bank, there are three parties that contribute to 504 loans: a bank, a Certified Development Company (CDC), and the borrower.

Because these three parties work together to issue the loan, you’ll find that the interest rates are much less straightforward than 7(a) loans, nevertheless, they tend to range from 4% to 7%.

This being said, although the 7(a) is often the top SBA loan option for franchise financing due to its flexibility, the 504/CDC may be a better solution if you’re purchasing new equipment or buying, improving, or expanding the real estate for your franchise location.

In order to qualify for an SBA 504/CDC loan for your franchise financing, you’ll once again need to ensure that your franchise is part of the SBA Franchise Directory. Additionally, you can expect the same qualifications as a 7(a) loan—great credit score, solid business financials, and at least some time in business.

Although an SBA 504/CDC loan requires higher qualifications and is slower to fund in comparison to other solutions on the market, this product offers some of the best rates and terms to finance a real estate or equipment need for your franchise.

Alternative Lenders

As we’ve mentioned, although SBA loans (as well as bank loans) can offer some of the best rates and terms for your franchise financing, they’ll also be slow to fund and require lengthy application processes—as well as stricter qualifications.

Therefore, if you need a franchise loan quickly, or can’t qualify for an SBA or bank loan, you should consider your options from alternative lenders.

These lenders may not offer the best rates and terms, but they’re able to provide a variety of products, simpler applications, and more lenient requirements.

Let’s explore some of the top options.

How to Apply for Franchise Financing

As is the case with any business loan, the application process for a franchise loan will likely be specific to the type of product and the lender you’re working with. For example, as we mentioned above, the process for applying to an SBA or bank loan for your franchise will be longer and require significant documentation. With many online lenders, on the other hand, you’ll likely be able to submit your documents quickly and easily online.

This being said, however, there are a handful of business loan requirements you can expect to be asked to provide, regardless of the specific application.

Here are a few to keep in mind:

Personal Credit History

Your personal credit score will be one of the most important factors that a lender looks at when you apply for franchise financing.

Ultimately, your personal credit score will indicate how reliable you are as a borrower—if you’re responsible with your personal debts, chances are you’ll be responsible with your business debts, too.

Therefore, before you apply for a franchise loan, you’ll want to check your credit score and see where it stands. If you have any unusual entries in your personal credit history—like unauthorized hard inquiries or accounts you didn’t open yourself—you’ll want to resolve those before you submit your franchise financing application.

Financial Information

Next, before you dive deep into the business loan application process, you’ll need to organize both your personal and business financial paperwork.

A lender will use this information to determine where your finances stand and how likely you will be to be able to pay back your franchise loan.

Specifically, you should expect to provide (at least) the following:

• Bank statements

• Balance sheet and income statements

• Personal and business tax returns

• Business debt schedule (if you have current debt)

Business Plan

Although not all lenders will require a business plan for funding, this requirement may be more significant for franchise business owners applying for financing.

This business plan will explain which franchise you intend to work with, how you plan to work with them, and how you plan to use your funding to start or grow your franchise business.

On the whole, lenders typically favor franchise businesses with brand names and long track records of success. Young franchises with few locations, therefore, may have greater difficulty qualifying for funding.

However, if you do want to secure franchise financing to open a branch of a smaller brand (or a new franchise altogether), you’ll want to strengthen your application in other ways—like with strong personal financial reports, a solid credit history, or a resume with significant business experience.

Basic Personal and Business Information

Finally, in order to verify the validity of your business operations, you’ll have to provide your franchise lender with basic information about you (as well as any other owners) and the business itself. Along these lines, you may be asked for documents such as:

• Personal background information and ID

• Resume

• Business license and permits

• Time in business and industry

• Proof of ownership

• Any other relevant legal or operating documents

Excerpts from: https://www.fundera.com/business-loans/guides/franchise-finance & https://www.franfund.com/401k-business-funding

Definition of a Franchise Consultant

What is a franchise consultant? The franchise business consultant definition is pretty straightforward. A franchise consultant counsels people who are considering franchise ownership. Most franchise consultants are part of a franchise consulting group such as IFPG.

With the candidate’s best interests in mind, IFPG Franchise Consultants guide candidates through the franchise selection, evaluation, and buying process. Once a candidate decides on a brand, consultants may also assist in acquiring the necessary capital to own and operate the business.

Franchise Consulting

Some people refer to franchise consultants as the industry’s best-kept secret. That’s because people outside of the industry are not always familiar with the role. But once people find out about franchise consultant opportunities and why people use franchise consultants, they want to hear more.

Most people in the industry know that franchise consultants have been vital in the industry’s growth. They also recognize the flexibility and freedom with franchise consulting. A career as an IFPG Franchise Consultant is like no other. It offers an incredible work-life balance, an opportunity to help others with tremendous income potential.

What Does a Franchise Consultant Do?

What does a franchise business consultant do? From a candidate’s perspective, the franchise consultant definition is a trusted advisor, counselor, educator, and guide. Franchise consultants start by assessing the most crucial issue—if franchise ownership is even the right path for the candidate. If it is, then through multiple conversations and other methods such as questionnaires, the consultant will narrow down several opportunities to explore. Good franchise consultants will work alongside their candidates until they have found the right opportunity and have a signed contract (franchise agreement) with a franchisor. The best franchise consultants always keep in touch with the people they placed in business to find out about the experience with the brand. This helps them identify other candidates who might be a good fit.

What is Franchise Consulting?

What is a franchise consultant? A franchise consultant serves as a trusted advisor to aspiring business owners. IFPG Consultant’s use their expertise and virtue to help candidate’s make the important life decision of entering into franchise ownership.

Franchise consulting is one part counseling and one part artistry. The franchise consultant must be an active listener to best serve the candidate. He has to understand a candidate’s background, interests, and desired lifestyle and then translate it into an ideal franchise opportunity. Sometimes a consultant understands more about what his candidate wants than the candidate even does. Above all, a franchise consultant must consider what’s best for the candidate.

Who is a Franchise Consultant?

Franchise consultants come from all walks of life. Some are retirees who want to keep working, but with a flexible schedule. Some are stay-at-home moms who have left careers to be home with children. Others are young professionals who see the value in the lucrative franchise industry and want financial freedom with their own business. Franchise consulting opportunities are ideal for people who are personable, attentive, and naturally curious about business opportunities. Above all, Franchise consultants should always take pride in working within the highest ethical standards.

Franchise Consultant Facts

If you want a quick rundown on franchise consulting, consider these compelling franchise consultant facts.

• Franchise consultants are in business for themselves.

• There is a lot of freedom with franchise consulting. franchise consultants decide how much, when, and where they will work.

• The success of a franchise consultant depends on the effort he or she puts in.

• Franchising is a booming industry. According to the International Franchise Association (IFA), franchising contributed $670 billion of economic output into the U.S. economy in 2020, and represented 3% of the total nominal Gross Domestic Product (GDP).

• By joining IFPG, the leading franchise consultant company, IFPG Franchise Consultants learn from the industry’s most experienced professionals and have access to hundreds of the leading franchise brands.

• The role of a business franchise consultant is pivotal in the success of both the potential franchisee and the franchisor.

• As part of IFPG’s franchise consulting group, franchise consultants become part of an extended “franchise family.” They work closely with fellow members to ensure their candidate finds a business that matches their interests, background, budget and desired lifestyle.

• The main priority for IFPG Franchise Consultants is ethical business practices. All IFPG Franchise Consultants follow the IFPG Code of Ethics.

• There are several names for franchise consultants, including franchise referral consultants, franchise brokers and franchise business consultants.

• IFPG Franchise Consultants have been instrumental in the industry’s accelerated growth. The greatest source of franchise leads that become deals are thanks to franchise referral consultants.

Free Franchise Consulting

Working with a franchise consultant is a no-brainer for prospective franchisees. Franchise consultants provide consultation services for free. Instead of charging the candidate, they are paid by the franchisor once the candidate decides to move forward and signs a contract (a.k.a franchise agreement).

Franchise Consultants (also known as Franchise Brokers) are Similar to Real Estate Brokers

The role of a franchise consultant is similar to a buyer’s real estate agent. Just like there are many benefits to using a Realtor, there are also many benefits of a Franchise Broker.

Franchise Consultants act as intermediaries between potential Franchisees and Franchisors. The franchise consultant’s job is to determine his candidate’s ideal business and narrow down opportunities that best match the candidate’s interests, experience, and resources. Just as there are multiple homes on the market to choose from, there are hundreds of opportunities— some of which the candidate may have never considered or heard of. In the end, the franchise consultant's most important job is to help a candidate decide which business is a good fit by explaining the pros and cons of various options.

From: https://www.ifpg.org/franchise-consultant-training/what-is-a-franchise-consultant

WHAT INFORMATION DOES A FRANCHISE DISCLOSURE DOCUMENT (FDD) CONTAIN?

The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision.

The Items Contained in a Franchise Disclosure Document

• Item 1: The franchisor and any parents, predecessors and affiliates. This section provides a description of the company and its history.

• Item 2: Business experience. This section provides biographical and professional information about the franchisors and its officers, directors, and executives.

• Item 3: Litigation. This section provides relevant current and past criminal and civil litigation for the franchisor and its management.

• Item 4: Bankruptcy. This section provides information about the franchisor and any management who have gone through a bankruptcy.

• Item 5: Initial fees. This section provides information about the initial fees and the range and factors that determine the amount of the fees.

• Item 6: Other fees. This item provides a description of all other recurring fees or payments that must be made.

• Item 7: Initial investment. This item is presented in table format and includes all the expenditures required by the franchisee to make to establish the franchise.

• Item 8: Restriction on sources of products and services. This section includes the restrictions that franchisor has established regarding the source of products or services.

• Item 9: Franchisee's obligations. This item provides a reference table that indicates where in the franchise agreement franchisees can find the obligations they have agreed to.

• Item 10: Financing. This item describes the terms and conditions of any financing arrangements offered by the franchisor.

• Item 11: Franchisor's Assistance, Advertising. Computer Systems and Training. This section describes the services that the franchisor will provide to the franchisee.

• Item 12: Territory. This section provides the description of any exclusive territory and whether territories will be modified.

• Item 13: Trademarks. This section provides information about the franchisor's trademarks, service and trade names.

• Item 14: Patents, copyrights and proprietary information. This section gives information about how the patents and copyrights can be used by the franchisee.

• Item 15: Obligation to participate in the actual operation of the franchise business. This section describes the obligation of the franchisee to participate in the actual operation of the business.

• Item 16: Restrictions on what the franchisee may sell. This section deals with any restrictions on the goods and services that the franchisee may offer its customers.

• Item 17: Renewal, termination, transfer, and dispute resolution. This section tells you when and whether your franchise can be renewed or terminated and what your rights and restrictions are when you have disagreements with your franchisor.

• Item 18: Public Figures. If the franchisor uses public figures (celebrities or public persons), the amount the person is paid is revealed in this section.

• Item 19: Financial Performance Representations. Here the franchisor is allowed, but not required, to provide information on unit financial performance.

• Item 20: Outlets and Franchisee Information. This section provides locations and contact information of existing franchises.

• Item 21: Financial statements. Audited financial statements for the past three years are included in this section.

• Item 22: Contracts. This item provides of all the agreements that the franchisee will be required to sign.

• Item 23: Receipts. Prospective franchisees are required to sign a receipt that they received the FDD.

From: https://www.franchise.org/faqs/what-information-does-a-franchise-disclosure-document-fdd-contain

Contacting Franchise Owners: Sample Validation Questions

When investigating a particular franchise business, be sure to take advantage of one of your best sources of information: current franchisees. By interviewing current franchisees, you can get an honest, inside take on the system’s culture, advantages, and challenges. This is a great way to get a detailed picture of what it would be like to own and operate a particular franchise.

This outline provides a starting point to help you to develop your list of validation questions. Some may not be relevant to all industries and may apply only to particular categories. You should add questions that are important to you.

Keep in mind that these business owners are participating as a courtesy to you. Whether you get great feedback or not-so-great feedback, it is important to draw your own conclusions about how you might fit into the culture of the franchise.

Validation Questions: Background

What type of work did you do before you got into your own business?

Why did you leave that job to go into your own business?

When did you open your business?

Why did you choose this franchise?

Validation Questions: Initial Training & Opening Support

Did your initial training adequately prepare you for opening your business?

During your first year in business, did the franchise company provide adequate support? Can you give an example?

What do you think is the biggest mistake that a first-year franchise owner can make?

What would cause a franchisee to fail?

Validation Questions: Ongoing Support

Has the franchise company continued to provide the level of ongoing support you expect and need? Can you give an example?

After initial training, what additional training does the franchisor provide? Is it regularly scheduled or provided as needed? What additional training have you received? What difference has that made for you in operating the business?

Is there enough or too much training? Is the franchise company flexible in giving more training to franchise owners who need/want it?

Does the franchise company host franchisee annual meetings or teleconference calls? (These meetings and calls are often a great source for information, training, and networking with other franchisees.)

Validation Questions: Marketing Programs

How does the franchisor contribute to your marketing efforts? What are the results of those marketing efforts?

What programs for lead generation has the franchise company introduced you to? Do you use those tactics? What are the results and costs of those tactics? Do you consider them worthwhile? What have you added locally to generate business?

Do you have any strong competitors in your area? If so, who? What do you think are the major competitive advantages that set you apart?

Validation Questions: Purchasing Power

Are you required to purchase from the franchisor, or may you purchase locally?

Can you purchase items from vendors outside the franchise company? Do you consider that good or bad? Why?

Does the franchisor use the collective buying power of the entire franchise to obtain discounts on supplies and/or inventory beyond what the individual franchisees could achieve? Can you give an example?

Validation Questions: Franchisor / Franchisee Relationship

Is the franchise company supportive and caring about you and your operations? What makes you say that?

Is the home office competent? Do they act with your interests in mind? Why do you say that? (The answer will tell you this owner’s perception as to whether or not everyone at HQ is on the same page, and performing as a team in the franchise owners’ best interests.)

Validation Questions: Investment Details and Role of the Owner

How did you determine the location/territory you have?

How much investment did it take you to get your business up and running? Did that include some working capital? How much working capital did you budget? How long a period was that intended for?

Currently, what is your hourly commitment to your business per week? Has that amount of time changed since the first few months you were open?

Is your role in the business what you wanted/expected it to be? If not, how is it different?

Validation Questions: Earnings

What were your expectations for annual revenue? How long did it take you to realize those expectations?

How long were you in business before you reached breakeven?

What was your annual net profit, as a number or percentage of sales last year? (If open for several years: was that fairly consistent with prior years? If not, greater or less?)

What has the greatest effect on your annual net profit?

What will you do differently in your business this year? Why have you decided that?

What separates higher performers from lower performers in your franchise system? Why do you say that?

Conclusion

If you had it to do over, would you decide to get into this business again? Why or why not?

Validation is a critical part of the investigation process that offers a wonderful opportunity for you to get a feel for the culture, competence, and owner’s perception of the franchise company. Keep in mind that it’s also a chance for the franchise company to find out how their owners perceive you as a potential franchisee. Make sure these conversations reflect you at your very best.

From: https://www.franchoice.com/contacting-franchise-owners-validation-questions/

11 Steps to a Franchise Site Selection

As the adage goes: Location. Location. Location. When working with businesses and franchises, location is truly everything. When it boils down to it, a franchise or business can provide great products and services, but if they are in a terrible location they most likely will not find themselves successful. In the site selection process, Heads of Operation look towards brokers to ensure they find the best spots possible. I have outlined 11 steps to a successful franchise site selection below and on whom the responsibilities lay at each point.

1. Evaluation (Broker, Franchisor, & Franchisee): The first step of this process is to identify the company’s needs, timeline, and property requirements. This should be a conversation between the franchisor and the broker to make sure both are on the same page.

2. Determine Geographic Priorities (Broker, Franchisor, & Franchisee): Once the broker and franchisor understand what they are looking for, they must analyze the area and look for strategic locations.

3. Identify and Evaluate Prospective Sites (Broker): The broker will then make an initial sweep of the available and non-listed properties based on these requirements.

4. Market Analysis and Demographics (Broker, Franchisor, & Franchisee): Once the sites are gathered, the broker should prepare reports such as demographic research, competitor research, traffic counts, and heat maps. It is then the job of the broker to use these reports to help the franchisee compare different spaces.

5. Tour Sites (Broker, Franchisor, & Franchisee): The broker, franchisor, and franchisee should then tour the sites in person. After the site visits, all should rank the sites in order of preference.

6. Proposal Process (Broker, Franchisor, & Franchisee): After narrowing down prospective sites and touring in person, the next step is to send out LOI’s. It is likely that you will be negotiating with multiple landlords concurrently to ensure that the franchisee finds a space that meets their most important needs (e.g. time to occupancy, build-to-suit needs, etc.).

7. Space Planning (Broker, Franchisor, Franchisee, & Contractor): Franchisor, franchisee, broker, and contractor meet to discuss the franchise layout and requirements in each space.

8. Negotiations and Lease Legality (Attorney, Franchisor, Franchisee, & Broker): After finalizing the selected site, the attorney, franchisor, franchisee, and broker negotiate purchase/lease details and the relevant documents.

9. Tenant Improvements and Construction (Contractor, Franchisor, & Franchisee): Contractor, franchisor, and franchisee ensure that improvements are built to client specifications and are on time and in line with the agreed upon budget.

10. Completion of work and Grand Opening (Contractor, Franchisor, & Franchisee): Franchisor, franchisee, and contractor assure obligations are fulfilled to franchisor satisfaction. Coordination of move-in and closing of property.

11. Client Check In (Broker, Franchisor, Franchisee, & Contractor): Broker checks that the contract obligations are fulfilled and that the franchisee is satisfied with their location.

Whether you are a new franchisee or on your 10th location, hopefully this will help you know what to expect in the franchise site selection process. In working with a number of national franchises, we have found these steps to be extremely successful for our clients. With this level of analysis a broker can help ensure that the franchise is in a location that will help push their business toward success.

From: https://www.ltpcommercial.com/blog/11-steps-to-a-franchise-site-selection/

What Is a Franchise Disclosure Document (FDD)?

The franchise disclosure document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. The document contains information essential to potential franchisees about to make a significant investment.

The FDD was previously known as the Uniform Franchise Offering Circular (UFOC) before it was revised by the Federal Trade Commission (FTC), the country's consumer protection agency, in July 2007. Franchisors had until July 2008 in order to comply with the revisions. The FDD has also been referred to as the Uniform Franchise Disclosure Document.

KEY TAKEAWAYS

• The franchise disclosure document (FDD) provides a clear picture of how the business relationship between the franchisee and franchisor will be conducted.

• Franchises can be very different in the support they offer in return for licensing fees.

• The FDD is a critical source of information when evaluating whether to become a franchisee, and the FTC has made the document a legal requirement.

Understanding a Franchise Disclosure Document (FDD)

The FDD outlines comprehensive information about the roles of both parties involved in the franchise—the franchisor and the franchisee—and is designed to enable the potential franchisee to make an honest and informed decision about their investment into the business. The document lays out how the investment will work in practice for the potential franchisee, which is critical because a franchise is a different type of investment/business.

A franchise is a license that a party (the franchisee) acquires to allow them to have access to a business's (the franchisor) proprietary knowledge, processes, and trademarks. This gives the franchisee the ability to sell a product or provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.

The franchisor may help the franchisee with finding a location, training, and advice on management, marketing, or personnel. The relationship does not necessarily end after the initial start-up, either. The franchisor may also provide support through newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars. Because franchises can be so varied in their approach, the role of the FDD is to explicitly lay out what will and will not be provided to the franchisee and how the relationship will work going forward.

It is worth noting that, although buying a franchise may come with training, support, and brand power, it is like any other investment—there is no guarantee of success. Anyone who may entertain the idea of opening up a franchise should carefully weigh the pros and cons before doing so. The FDD is a critical source of information for that evaluation process.

Requirements for a Franchise Disclosure Document (FDD)

The FDD is divided up into 23 sections and the potential franchisee must review each of them before signing.

According to the FTC, franchisors have an obligation to provide the franchisee with the FDD at least 14 days before it needs to be signed or before any initial money is exchanged. The franchisee has a right to a copy of the FDD after the franchisor has received the application and agreed to consider it.

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:

1. The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.

2. Business experience: Outlines the experience of the executive team running the franchise system.

3. Litigation: Covers pending actions, material actions, and prior actions against the franchise.

4. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed.

5. Initial fees: A franchisor must disclose any fees charged to franchisees.

6. Other fees: Hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful to reveal all charges and be fully transparent.

7. Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of their working capital.

8. Restrictions on sources of products and services: Covers any required purchases of goods and services, in addition to disclosing any ownership or financial relationship between the franchise and required suppliers.

9. Franchisee’s obligations: Lays out the franchisee's obligations in a reference table.

10. Financing: Outlines the conditions of any financing arrangements.

11. Franchisor’s assistance, advertising, computer systems, and training: Explains the pre-opening and ongoing assistance that the franchisee can expect from the franchisor.

12. Territory: While there is no obligation to give a franchisee any range or territory to do business, this is the space to indicate any geographical restrictions a franchisor is putting on the franchisee.

13. Trademarks: Discloses the trademarks registered to the franchise.

14. Patents, copyrights, and proprietary information: This section discloses patents, copyrights, and other protected information not covered under the trademarks section.

15. Obligation to participate in the actual operation of the franchise business: This makes it explicit whether the franchise can be held as an arms-length investment or whether direct participation is expected.

16. Restrictions on what the franchisee may sell: Covers whether only franchise approved goods and services can be sold.

17. Renewal, termination, transfer, and dispute resolution: Outlines the described processes.

18. Public figures: Covers any person whose name or physical appearance is associated with the franchise. For example, a particular celebrity who appears in franchise commercials.

19. Financial performance representations: An optional space for a franchisor to estimate a franchise's potential performance based on reasonable assumptions.

20. Outlets and franchisee information: Where the franchise stats are disclosed as to the number of company-owned outlets and franchised outlets in operation for the last three years.

21. Financial statements: A franchisor must provide three years of financial statements to the franchisee as part of the FDD. This includes balance sheets, statements of operations, owner’s equity, and cash flows.

22. Contracts: This is where the franchisor outlines the franchise agreement. It may also include financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other contracts specific to the franchise's situation.

23. Receipts: This is the final section of the FDD. Here, the franchisor will review the disclosure and business decisions outlined between the two parties and provide the franchisee with any additional information.

From: https://www.investopedia.com/terms/f/franchise-disclosure-document.asp

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:

1. The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.

2. Business experience: Outlines the experience of the executive team running the franchise system.

3. Litigation: Covers pending actions, material actions, and prior actions against the franchise.

4. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed.

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:

1. The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.

2. Business experience: Outlines the experience of the executive team running the franchise system.

3. Litigation: Covers pending actions, material actions, and prior actions against the franchise.

4. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed.

5. Initial fees: A franchisor must disclose any fees charged to franchisees.

6. Other fees: Hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful to reveal all charges and be fully transparent.

7. Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of their working capital.

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:

1. The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.

2. Business experience: Outlines the experience of the executive team running the franchise system.

3. Litigation: Covers pending actions, material actions, and prior actions against the franchise.

4. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed.

5. Initial fees: A franchisor must disclose any fees charged to franchisees.

6. Other fees: Hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful to reveal all charges and be fully transparent.

7. Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of their working capital.

8. Restrictions on sources of products and services: Covers any required purchases of goods and services, in addition to disclosing any ownership or financial relationship between the franchise and required suppliers.

9. Franchisee’s obligations: Lays out the franchisee's obligations in a reference table.

10. Financing: Outlines the conditions of any financing arrangements.

11. Franchisor’s assistance, advertising, computer systems, and training: Explains the pre-opening and ongoing assistance that the franchisee can expect from the franchisor.

12. Territory: While there is no obligation to give a franchisee any range or territory to do business, this is the space to indicate any geographical restrictions a franchisor is putting on the franchisee.

13. Trademarks: Discloses the trademarks registered to the franchise.

14. Patents, copyrights, and proprietary information: This section discloses patents, copyrights, and other protected information not covered under the trademarks section.

15. Obligation to participate in the actual operation of the franchise business: This makes it explicit whether the franchise can be held as an arms-length investment or whether direct participation is expected.

16. Restrictions on what the franchisee may sell: Covers whether only franchise approved goods and services can be sold.

17. Renewal, termination, transfer, and dispute resolution: Outlines the described processes.

18. Public figures: Covers any person whose name or physical appearance is associated with the franchise. For example, a particular celebrity who appears in franchise commercials.

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:

1. The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.

2. Business experience: Outlines the experience of the executive team running the franchise system.

3. Litigation: Covers pending actions, material actions, and prior actions against the franchise.

4. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed.

5. Initial fees: A franchisor must disclose any fees charged to franchisees.

6. Other fees: Hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful to reveal all charges and be fully transparent.

7. Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of their working capital.

8. Restrictions on sources of products and services: Covers any required purchases of goods and services, in addition to disclosing any ownership or financial relationship between the franchise and required suppliers.

9. Franchisee’s obligations: Lays out the franchisee's obligations in a reference table.

10. Financing: Outlines the conditions of any financing arrangements.

11. Franchisor’s assistance, advertising, computer systems, and training: Explains the pre-opening and ongoing assistance that the franchisee can expect from the franchisor.

12. Territory: While there is no obligation to give a franchisee any range or territory to do business, this is the space to indicate any geographical restrictions a franchisor is putting on the franchisee.

13. Trademarks: Discloses the trademarks registered to the franchise.

14. Patents, copyrights, and proprietary information: This section discloses patents, copyrights, and other protected information not covered under the trademarks section.

15. Obligation to participate in the actual operation of the franchise business: This makes it explicit whether the franchise can be held as an arms-length investment or whether direct participation is expected.

16. Restrictions on what the franchisee may sell: Covers whether only franchise approved goods and services can be sold.

17. Renewal, termination, transfer, and dispute resolution: Outlines the described processes.

18. Public figures: Covers any person whose name or physical appearance is associated with the franchise. For example, a particular celebrity who appears in franchise commercials.

19. Financial performance representations: An optional space for a franchisor to estimate a franchise's potential performance based on reasonable assumptions.

20. Outlets and franchisee information: Where the franchise stats are disclosed as to the number of company-owned outlets and franchised outlets in operation for the last three years.

21. Financial statements: A franchisor must provide three years of financial statements to the franchisee as part of the FDD. This includes balance sheets, statements of operations, owner’s equity, and cash flows.

22. Contracts: This is where the franchisor outlines the franchise agreement. It may also include financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other contracts specific to the franchise's situation.

23. Receipts: This is the final section of the FDD. Here, the franchisor will review the disclosure and business decisions outlined between the two parties and provide the franchisee with any additional information.