What to Know Before You Buy a Franchise

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You made your decision and have evaluated the franchise you want to purchase. You are ready to make the investment and complete the required training to start your business. Before you make a final commitment, you should check out two things: the FTC and the FDD. Let’s look at what each of these acronyms stand for and what they mean to your business.

  • U.S. Federal Trade Commission (FTC): The FTC’s mission is “to prevent business practices that are anticompetitive or deceptive or unfair to consumers; to enhance informed consumer choice and public understanding of the competitive process; and to accomplish this without unduly burdening legitimate business activity.”
  • Franchise Disclosure Document (FDD): The FDD is a legal document that the FTC requires franchisors to provide to franchise candidates. The prospective franchise owner must receive the FDD at least 14 days prior to purchasing the franchise. An FDD is intended to give candidates the information they need to make a wise decision about whether to buy the franchise.

The FTC more or less provides legal guidelines that a franchisor must follow in order to protect both consumers and franchisors. FTC guidelines are designed to promote integrity for both franchisors and franchisees, and the information is upfront, clear and concise.

However, a franchisor’s FDD may be lengthy and contain legal descriptions that a potential franchisee needs clarified. With the FDD, both parties are protected, as all information is documented and available before closing the deal — there are no verbal agreements that may prove to be worthless for the prospective franchisee.

The franchisor’s information in the FDD is accurate and legally binding for both parties. In the event that you are not comfortable with the FDD, you could hire an attorney to provide you with the legalities and commitments written in the document. It would be good practice to review with a qualified franchise attorney regardless of how comfortable that you are with the agreement.

The FDD is an important part of your business venture. It provides the rules and regulations that must be followed, as well as information that you may not be able to easily obtain on your own. Some types of information that you will find in the FDD:

  • Industry trends
  • Competition
  • Advertising costs
  • Current and former franchisees
  • Territory
  • Renewal and termination
  • Royalties
  • Financial statements
  • Obligations

Most of the time, franchisors have worked hard and succeeded with a proven business model and they have prospered. They will have in criteria in place to which franchisees must adhere to, or else you may not be eligible to continue to do business with and for the franchisor.

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