The REAL way to research and understand franchise models
Many people are not aware that franchising, and franchise sales in particular, are regulated by the Federal Trade Commission (FTC). The good news about that is that a tremendous amount of information will eventually be disclosed to you in the form of the Franchise Disclosure Document. For example, in the back of the Franchise Disclosure Document (FDD) is the ACTUAL franchise agreement (contract) that you will be required to sign in order to buy the rights to the license agreement and use of the trademark and territory restrictions that you will be subject to.
The actual agreement is what creates the legal obligations of both parties (you and the franchisor) and is what is enforceable. The FDD itself is more or less a standardized document that outlines all the fees, obligations of both parties, background of the franchisors, any legal actions or settlements (technically only the last 3 years need to be disclosed but many list all of them) AND, most importantly, the names and contact information for all known existing franchisees.
So, in summary – FDD – lots of good information in a standardized format so you can compare apples to apples of franchise to franchise. However the actual agreement is the contract, enforceable by law, that you’ll be required to sign. Two different things – but both conveniently required to be sent to you at the same time.
There are partners you will be using along the way while you are researching your opportunities. First and foremost is a good franchise consultant/broker. Like Doctors, some are good, and some are bad so check references and interview as many as you need to be comfortable you are in good hands. For example, some franchise consultants actually own a franchise – to be a franchise consultant! Those are restricted by their territories and the inventory that is on their firms “approved” list. You may think that means those have been vetted in detail, but in my experience that is simply not true. A good franchise consultant should be profiling you on your strengths, and weaknesses, analyzing your market using a detailed market analysis tool, and doing some sort of psychometric assessment to try to determine cultural and values fit.
The other partners you will be working with along the way (often resources your franchise consultant can provide – and more than one so you know they don’t have “favorites”) are: franchise attorneys (to help you review documents when you get that far), lenders, insurance agents (eventually) , commercial real estate brokers (if business is bricks and mortar) and possibly a CPA to help you build out your business plan for SBA and evaluate the stability of the brand you are looking at. Again, every franchise businesses audited financials are required to be in the FDD.
If you’d like to know more about the detailed steps of the 2-4 month due diligence process – here’s a link to our free eBook that goes into much more detail