FDD Example: 13 Sections You Must Understand

See an FDD example and find out which sections you must study closely before making a franchise investment.

What’s in an FDD?

An FDD, or Franchise Disclosure Document, is a legal document that franchisors must provide to prospective franchisees. It contains 23 sections, each detailing different aspects of the franchise system, its operations, and the obligations of both parties. The FDD is designed to give you a comprehensive understanding of the business, allowing you to make an informed investment decision.

An FDD is typically a lengthy document, often exceeding 200 pages. It includes legal jargon and detailed information about the franchise. While the volume of information can seem overwhelming, breaking it down into manageable sections can make it easier to digest. You may also want to hire a franchise attorney to review the document with you and answer any questions.

Essential Sections You Must Understand

In our FDD example, we’ve highlighted the key sections you should focus on:

1. Item 1: The Franchisor, and Any Parents, Predecessors, and Affiliates: This section provides background information on the franchisor and its related entities. Look at the company’s history, including how long it has been in operation and any changes in ownership. This information can provide insight into the stability and experience of the franchisor.
2. Item 2: Business Experience: Item 2 details the business experience of the franchisor’s executives. Review the biographies of these key individuals to assess their expertise and track record in franchising. Strong leadership is a positive indicator of a brand’s vitality.
3. Item 3: Litigation: This section lists any litigation involving the franchisor, its affiliates, or its executives. Pay close attention to any ongoing or past lawsuits. A history of frequent litigation could indicate potential risks.
4. Item 4: Bankruptcy: Item 4 discloses any bankruptcy filings by the franchisor or its principals. A history of bankruptcy could signify financial instability. It’s crucial to understand the context and timing of any such filings.
5. Item 5: Initial Fees: Item 5 outlines the initial fees you must pay to open a franchise. These fees can include the initial franchise fee, training fees, real estate fees, and any other upfront costs. Make sure to understand what each fee covers and compare them with other franchise opportunities.
6. Item 6: Other Fees: This section details all other fees you’ll be required to pay, such as royalties, advertising fees, and renewal fees. It’s essential to understand the ongoing financial obligations and how they will impact your bottom line.
7. Item 7: Estimated Initial Investment: Item 7 provides an estimate of the total initial investment required to start the franchise. This includes expenses like equipment, inventory, real estate, and working capital. Use this section to ensure you have a clear picture of the financial commitment needed.
8. Item 8: Restrictions on Sources of Products and Services: Item 8 outlines any restrictions on where you can purchase products or services. Some franchisors require you to buy from approved suppliers, which can impact your operating costs. Understand these restrictions and their potential impact on your business operations.
9. Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training: This section describes the support the franchisor will provide, including training, marketing, and technology systems. Evaluate the quality and extent of support to ensure it meets your needs and expectations.
10. Item 12: Territory: Item 12 details the geographic territory granted to you. This can include exclusive territories or areas where you have the right to operate. Understanding your territory is crucial for assessing market potential and competition.
11. Item 19: Financial Performance Representations: Item 19 in the FDD provides financial performance representations, which can give you an idea of the system’s overall financial health, including the franchise AUV, or average unit volume. Be cautious and use this information as one of many factors in your decision-making process. Look for concrete data and ask for clarification if needed.
12. Item 20: Outlets and Franchisee Information: This section lists the number and location of existing franchises, as well as any closures. Contact current and former franchisees to get firsthand insights into their experiences and the support provided by the franchisor.
13. Item 21: Financial Statements: Item 21 includes the franchisor’s audited financial statements. Review these statements with the help of a financial advisor to assess the franchisor’s financial status and stability.

Get Involved with Teriyaki Madness

By focusing on these essential sections, you’ll be better equipped to evaluate franchise opportunities and make informed investment decisions. Teriyaki Madness provides a comprehensive and transparent FDD for potential franchise investors, and if you have any questions—just ask. To learn more about what our brand has to offer, download our franchise report.