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Understanding the Franchise Disclosure Document (FDD)

Master the Franchise Disclosure Document (FDD) to align your franchise venture with your goals and secure a profitable future in franchising a restaurant.

4 mins readDecember 25, 2023

Restaurant Franchise eBook

Embark on your franchising journey with confidence by mastering the Franchise Disclosure Document (FDD). This essential guide for U.S. franchise buyers delves into the franchisor-franchisee relationship, revealing key insights into support, investment specifics, and more. We'll navigate the FDD's 23 critical sections, from financial obligations to operational duties, and uncover negotiation strategies to safeguard your interests.

By understanding and negotiating the FDD effectively, you'll gain the knowledge to make informed decisions, aligning your franchise venture with your entrepreneurial aspirations and ensuring a more secure and profitable business future.

The FDD is divided into 23 sections and the potential franchisee must review each of them before signing. Here's a breakdown of the must-knows of the the FDD:


ItemClause Name/TypeDescriptionSignificance for Restaurant Franchisee
1Franchisor BackgroundOverview of the franchisor's history, business ventures, and any relevant competition or regulations.Helps assess the franchisor's stability and potential growth, crucial for long-term success.
2Business ExperienceDetails the experience and background of the franchisor's executives.Enables evaluation of the leadership's expertise, impacting the franchise's potential.
3LitigationInformation on past litigation involving the franchisor or its executives.Indicates potential legal risks or operational issues within the franchise network.
4BankruptcyDiscloses any recent bankruptcies involving the franchisor or its executives.Assesses financial stability and potential risks in investment.
5Initial FeesOutlines upfront fees for starting the franchise.Critical for financial planning; impacts initial investment and budgeting.
6Other FeesLists ongoing operational fees.Affects long-term financial planning and profitability.
7Estimated Initial InvestmentBreakdown of initial investment costs.Essential for understanding the full financial commitment required.
8Product/Service SourcesRestrictions on suppliers and products.Impacts menu options, cost of goods, and supply chain management.
9Franchisee ObligationsSummarizes the franchisee's responsibilities.Clarifies operational expectations and legal obligations.
10FinancingFinancing options offered by the franchisor.Affects funding and financial planning for the franchise.
11Assistance and TrainingDetails on support, advertising, and training provided.Key for operational success and adherence to brand standards.
12TerritoryDefines the franchisee's operational territory.Impacts market potential and competition.
13TrademarksUse of franchisor's trademarks.Essential for brand identity and marketing.
14Intellectual PropertyInformation on patents, copyrights, etc.Protects proprietary information and brand uniqueness.
15Operational ParticipationRequirements for franchisee's involvement in operations.Determines the level of personal commitment and operational control.
16Sales RestrictionsLimits on what can be sold.Directly affects menu and service offerings.
17Renewal/TerminationTerms for contract renewal or termination.Important for understanding the lifecycle of the franchise agreement.
18Public FiguresInvolvement of public figures in the franchise.Can impact brand perception and marketing.
19Financial PerformanceFinancial projections or historical data.Aids in assessing potential profitability and risks.
20Outlets InformationData on existing and former franchise locations.Provides insight into network size and growth trends.
21Financial StatementsAudited financial statements of the franchisor.Crucial for evaluating the financial health of the franchisor.
22ContractsCopies of all contracts and agreements.Necessary for legal review and understanding of all commitments.
23ReceiptsAcknowledgement of FDD receipt.Formalizes the review process and starts the consideration period.

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The Essential Elements of the FDD

The FDD is divided into 23 sections and the potential franchisee must review each of them before signing. Here's a breakdown of the must-knows of the the FDD:


ItemClause Name/TypeDescriptionSignificance for Restaurant Franchisee
1Franchisor BackgroundOverview of the franchisor's history, business ventures, and any relevant competition or regulations.Helps assess the franchisor's stability and potential growth, crucial for long-term success.
2Business ExperienceDetails the experience and background of the franchisor's executives.Enables evaluation of the leadership's expertise, impacting the franchise's potential.
3LitigationInformation on past litigation involving the franchisor or its executives.Indicates potential legal risks or operational issues within the franchise network.
4BankruptcyDiscloses any recent bankruptcies involving the franchisor or its executives.Assesses financial stability and potential risks in investment.
5Initial FeesOutlines upfront fees for starting the franchise.Critical for financial planning; impacts initial investment and budgeting.
6Other FeesLists ongoing operational fees.Affects long-term financial planning and profitability.
7Estimated Initial InvestmentBreakdown of initial investment costs.Essential for understanding the full financial commitment required.
8Product/Service SourcesRestrictions on suppliers and products.Impacts menu options, cost of goods, and supply chain management.
9Franchisee ObligationsSummarizes the franchisee's responsibilities.Clarifies operational expectations and legal obligations.
10FinancingFinancing options offered by the franchisor.Affects funding and financial planning for the franchise.
11Assistance and TrainingDetails on support, advertising, and training provided.Key for operational success and adherence to brand standards.
12TerritoryDefines the franchisee's operational territory.Impacts market potential and competition.
13TrademarksUse of franchisor's trademarks.Essential for brand identity and marketing.
14Intellectual PropertyInformation on patents, copyrights, etc.Protects proprietary information and brand uniqueness.
15Operational ParticipationRequirements for franchisee's involvement in operations.Determines the level of personal commitment and operational control.
16Sales RestrictionsLimits on what can be sold.Directly affects menu and service offerings.
17Renewal/TerminationTerms for contract renewal or termination.Important for understanding the lifecycle of the franchise agreement.
18Public FiguresInvolvement of public figures in the franchise.Can impact brand perception and marketing.
19Financial PerformanceFinancial projections or historical data.Aids in assessing potential profitability and risks.
20Outlets InformationData on existing and former franchise locations.Provides insight into network size and growth trends.
21Financial StatementsAudited financial statements of the franchisor.Crucial for evaluating the financial health of the franchisor.
22ContractsCopies of all contracts and agreements.Necessary for legal review and understanding of all commitments.
23ReceiptsAcknowledgement of FDD receipt.Formalizes the review process and starts the consideration period.

What You Should Negotiate in the FDD

The Franchise Disclosure Document given to you by the Franchisor will be drafted in a way that benefits them, not you. A contract lawyer will help you renegotiate those clauses, phrasing them in a way that benefits you more.

Whether or not you receive external legal advice, it’s important to know what clauses can be turned in your favor. Let’s have a look at them:


Item 5 & 6: Initial and Other Fees


What is this? The initial fee, otherwise known as the “franchise fee” is what you will pay to the franchisor for the right to use their brand and operating system. Other fees, otherwise known as the “service fee”, include ongoing royalties and other operational fees to the franchise company.

What should you know? Although the FDD may state that the initial and other fees are non-refundable, there are scenarios where a refund might be negotiated:


Refund of initial feeRefund of Other fees
Failure to Open: If the franchisor fails to provide essential support or if there are delays in opening the franchise due to the franchisor's actions, a partial or full refund clause can be negotiated.

Misrepresentation or Non-Disclosure: If the franchisee discovers that the franchisor misrepresented or failed to disclose critical information that affects the franchise's potential success.
Performance-Based Clauses: If the franchisor does not meet specific performance benchmarks (e.g., support, training, marketing efforts), a reduction or temporary suspension of fees could be negotiated.

Business Interruption: In cases of unforeseen circumstances (like natural disasters or pandemics) that significantly impact the franchise's operation, a temporary reduction or deferment of fees might be negotiated.

Good to know? Any clauses related to refundability should be clear and specific, detailing the conditions under which refunds or fee adjustments are applicable. Consider how these clauses play into your overall exit strategy from the franchise.

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Item 8: Restrictions on Sources of Products and Services


What is it? This will be a set of restrictions on where you can source your products and services. This will have an impact on your menu options, cost of goods, and supply chain management.

What should you know? Advocating for sourcing flexibility:

  1. Supplier Options: Negotiate for the right to choose from a list of approved suppliers or the ability to source equivalent equipment and supplies from alternative vendors, provided they meet certain standards.

  1. Local Sourcing Benefits: Present the benefits of local sourcing, such as reduced shipping costs, support for local businesses, and potential for faster supply chain response.

  1. Quality and Price Assessments: Argue for the ability to conduct independent quality and price assessments of recommended suppliers to ensure you're getting the best value for your investment.

Good to know: You have a right to inspect and challenge costs:

What to inspect?What to request?
Inspection ClauseEnsure the agreement includes a clause that allows you to inspect equipment and other items for condition and suitability before purchase.
Quality StandardsEstablish clear quality standards in the agreement. If the equipment or supplies do not meet these standards, you should have the right to reject them or request a price adjustment.
Warranty and Replacement Terms:Negotiate terms for warranties, replacements, or refunds for equipment that is found to be subpar or not as described.
Independent AppraisalsIn cases of second-hand or franchisor-supplied equipment, insist on the right to have an independent appraisal to assess the condition and fair market value.
Documentation of CostsRequest documentation or receipts of the original purchase prices for any used or franchisor-supplied equipment to ensure you're not being overcharged.
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Item 9: Franchisee's Obligations


What is it? Franchisee's Obligations outlines the specific duties and responsibilities that the franchisee must adhere to as part of the franchise agreement. This section typically covers a wide range of obligations, including but not limited to:

  • Compliance with operational guidelines and standards.
  • Participation in training and ongoing educational programs.
  • Financial reporting requirements.
  • Marketing and advertising commitments.
  • Maintenance of premises and equipment.
  • Purchasing or leasing requirements for supplies and equipment.
  • Staffing and employee training requirements.
  • Adherence to health, safety, and regulatory standards.

What should you know? Here are key strategies to ensure that the obligations are fair, equitable, and not overly burdensome:

  1. Reasonable Training Requirements: Training is essential, but it should be reasonable in terms of time, cost, and frequency. Negotiate for training programs that are beneficial without being overly burdensome, especially in terms of operational downtime or staffing.

  1. Fair Financial Reporting: While regular financial reporting is standard, ensure that the requirements are reasonable and do not impose an excessive administrative burden. Negotiate for reporting frequencies and formats that are manageable.

  1. Marketing and Advertising Autonomy: Seek to negotiate some level of autonomy in local marketing efforts. While adhering to national campaigns, having the flexibility to engage in local marketing can be crucial for a restaurant's success.

  1. Renegotiation Clauses: Include clauses that allow for the renegotiation of certain obligations if circumstances change significantly, such as major economic shifts or changes in local market conditions.

  1. Exit Clauses: Ensure there are fair and reasonable exit clauses related to the obligations, allowing for a way out if the business is not viable or if the franchisor fails to uphold their end of the agreement.

Good to know? When negotiating the franchisee's obligations in an FDD for a restaurant, the focus should be on ensuring that these obligations are clear, reasonable, and allow for some degree of flexibility to adapt to the unique challenges of the restaurant industry.

Restaurant loyalty

Item 10: Financing


What is it? Item 10: Financing details the financing options that the franchisor offers to franchisees. These options can vary widely depending on the franchisor, but typically include:

  • Direct Financing: The franchisor may offer loans directly to the franchisee to cover various costs such as the franchise fee, startup costs, equipment, or inventory.

  • Third-Party Financing: The franchisor may have arrangements with third-party lenders. These lenders provide loans to franchisees, often with terms that are pre-negotiated by the franchisor.

  • Leasing Programs: For equipment or real estate, franchisors might offer leasing options either directly or through a third party.

  • Deferred Payment Plans: Some franchisors offer plans that allow franchisees to start paying certain fees or costs after a certain period, giving them time to establish the business.

  • Royalty Financing: In some cases, franchisors might offer financing options tied to future royalties, where a portion of the franchisee's future earnings is used to repay the loan.

What you should know? Here are strategies to negotiate more favorable financing terms for you, the franchisee:


Negotiation AspectStrategyDetails
Lower Interest RatesCreditworthinessDemonstrate your creditworthiness and financial stability to negotiate a lower interest rate.
Comparison ShoppingPresent competitive rates from other lenders as leverage in negotiations.
Volume DiscountsUse the potential of opening multiple units as leverage to negotiate lower rates.
Better Repayment TermsExtended Loan DurationRequest a longer loan term to reduce the monthly payment burden.
Grace PeriodsNegotiate for a grace period before repayments begin, crucial for new restaurants.
Flexible Repayment SchedulesAdvocate for repayment schedules that align with your business's cash flow.
Collateral NegotiationsLimit CollateralTry to limit the collateral required for the loan to the assets of the franchise itself.
Prepayment OptionsNo Prepayment PenaltyEnsure there is no penalty for early repayment of the loan.
Loan CovenantsReasonable CovenantsReview and negotiate any loan covenants to ensure they are reasonable.
Transparency and ClarityClear TermsEnsure all terms, including interest rates, fees, and penalties, are clearly stated and understood.
Professional AdviceHave a financial advisor or attorney review the proposed financing terms.

Good to know? When negotiating financing options in an FDD, it's crucial to focus on obtaining terms that are sustainable and aligned with the projected cash flows of the restaurant. This involves not only negotiating lower interest rates and better repayment terms but also understanding the full implications of the financing agreement.

Takeaways

1. Understand the Franchisor's Background: Research the franchisor's history and business ventures to assess their stability and growth potential.


2. Evaluate Leadership Experience: Scrutinize the experience of the franchisor's executives to gauge the franchise's potential success.


3. Be Aware of Litigation History: Investigate any past litigation involving the franchisor, as it may indicate potential legal risks.


4. Check for Bankruptcy Records: Review any bankruptcy history of the franchisor to understand financial stability and investment risks.


5. Plan Financially for Initial Fees: Prepare for upfront costs, including the franchise fee, and understand their impact on your budget.


6. Consider Ongoing Operational Fees: Factor in ongoing fees like royalties in your long-term financial planning for sustained profitability.


7. Scrutinize Estimated Initial Investment: Analyze the breakdown of initial investment costs to understand the full financial commitment required.


8. Negotiate Supplier Flexibility: Advocate for the right to choose or suggest suppliers to potentially reduce costs and improve quality.


9. Clarify Franchisee Obligations: Ensure you fully understand your responsibilities and negotiate terms that are fair and manageable.


10. Explore and Negotiate Financing Options: Investigate financing options offered by the franchisor and negotiate for favorable terms, including lower interest rates and flexible repayment schedules.

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