What Do You Need to Know about the Franchise Disclosure Document?

Many people are turning to buying a franchise as an alternative to the standard corporate job. They are attracted by the numerous franchise opportunities and the prospect of gaining control over their destiny. The numbers paint a pretty picture as well: according to recent reports, the local franchise industry continues to grow and accounts for more than 3% of the annual GDP.

But, regardless of the business niche you are interested in, if you contemplate the prospect of buying a franchise, you need to first familiarize yourself with the Franchise Disclosure Document (FDD).

 

What is an FDD?

The FDD is a legal document that every franchise for sale must provide to prospective buyers. The FDD is usually sent by the franchisors a few days before signing the contract or agreeing on any financial transactions.

Most FDDs include the following information:

  • An overview of the company’s history
  • Initial franchise fees
  • Legal obligations for both parties
  • Proprietary information and patents
  • Termination, transfer, and renewal

Some franchise agreements can also include financial performance representations.

How to Read a Franchise Disclosure Document

A Franchise Disclosure Document runs in hundreds of pages, and it’s usually written in an intimidating language. If you are not familiar with the jargon, it can be hard to comprehend all the important pieces of information. To help you make sense of it and ensure that you won’t be missing any franchise opportunities, we’ll walk you through some of the most important items in an FDD.

Pay Attention to the Franchise Company

Most FDDs begin with a brief history of the franchise for sale and and often include detailed information about the business model, profits, and so on. Although pretty basic, this section can provide valuable insights into the franchise’s past, especially if it has been sold and purchased many times over the years.

Make Sure You Understand the Litigation

Franchisors are required to disclose all litigation they’ve been involved in during the last few years. Don’t get worried if you notice a few claims – even the most successful businesses are bound to have a few cases listed. However, be wary if the franchise has multiple lawsuits or class actions pending that could bankrupt the company.

Carefully Analyze the Estimated Initial Investment

This section details the various costs that you’ll have to pay to become a franchisee. To make sense of the numbers, you need to know what the average initial fees for a similar business are as well as the costs for marketing, equipment, real estate, and so on.

Don’t Neglect the Fees and Expenses

Do yourself a favor and carefully analyze the fees section. Royalties are a regular ongoing fee, but they are not the only ones. Depending on the industry, look for software licensing fees, advertising fees, and so on.

Financing

The Financing section of the FDD tells you whether the franchise for sale offers a lending program or if the company has deals with outside lenders. Make sure you understand the financing plan and stipulations. Keep in mind that borrowing from your franchisor is similar to lending money from a bank. Ensure that you follow and respect the credit terms. Otherwise, the franchisor might choose to terminate the agreement.

Trademarks, Patents, and Proprietary Information

This section of the Franchise Disclosure Document is pretty straightforward, and it lists the patents, copyrights, and trademarks that the franchisor has obtained. A trademark that isn’t registered is a red flag, so keep your eyes opened for any potential problems.

Review the Terms of Termination and Renewal

One of the most important things when reading a franchise agreement is ensuring that you understand the relationship between the franchisee and the franchisor. Carefully review the terms of termination and renewal and make sure you understand how disputes will be resolved. As a rule of thumb, try to include as many financial conditions into the renewal as possible.

Analyze the Financial Statements

One key question to ask yourself is whether the franchisor is making the bulk of its revenue from ongoing royalties (a sign of a profitable business) or from selling new franchises (a potential red flag).

Financial Performance Representation

Some FDD can include details about what the franchisees may expect in terms of sales and profits. This critical information can help you determine whether you should invest or keep looking for other franchise opportunities. Unfortunately, this information is voluntary, and about 70% of franchisors choose not to include it in the document.

In some regards, and FDD is similar to a prenuptial agreement: not very romantic, but you’d better read it carefully before you sign it. Keep these tips in mind when selecting your next franchise opportunity.

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Bright Market Prospects for Home Businesses

Employees thinking of starting their own business from their kitchen or bedroom but have misgivings about the wisdom of their plan may get the push they need from two fronts: proponents of home businesses and the latest market research. Both indicate a long-term uptrend that will continue to accelerate in the coming years. In short: home-based business are here to stay, and grow.

“Over the next 20 to 30 years, you could see the percentage of people who are self-employed and home-based double, potentially,” says small-business blogger Steve King. He bases his prediction on new developments that favor the home business segment, mainly having to deal with technological advances, low operating costs, and the outsourcing of business functions by large companies to overseas providers.

There is also the changing perception about home-based entrepreneurs. Once dismissed as amateur hobbyists and part-time crafters — given “a kind of second-class citizenship in the small business world,” according to business journalist Carol Tice — “homepreneurs” are now being recognized as legitimate business practitioners.

This is due largely to trends that are making home enterprises acceptable, says King. “[You’ve] got the technology, the legitimacy, and the fundamental fact that it’s cheaper.”

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Home Businesses as Economy Drivers

Two reports released last year reinforce the view that home businesses are serious and viable sources of alternative income for workers, with a crucial role to play in economic growth.

“Homepreneurs: A Vital Economic Force” was published Emergent Research, a home-based research and consulting firm in Lafayette, California, that is run by King and his wife, Carolyn Ockels.

Among the report’s findings: Homepreneurs in the United States comprise a seldom recognized economic force that numbers about 6.6 million businesses. They account for some 34% of all small businesses that provide more than half of the owner’s household income. About 35% of these homepreneurs have annual revenues of more than $125,000, and 8%, more than $500,000.

“Home Business Report” was released by Enterprise Nation, a Web site for home businesses in the United Kingdom. Emma Jones, founder of Enterprise Nation, notes in the report that 2015 “has been a good year for home business” in the U.K. The number of people starting and growing a business from home rose to 2.8 million, an increase of 300,000 businesses over the past 12 months. These home-located entrepreneurs contribute a total of £284 billion to the annual UK economy, says the report.

U.S. Home Business Report Highlights

Here are more findings from “Homepreneurs: A Vital Economic Force.”

  • Some 75% of homepreneurs report working full time in their home business.
  • Homepreneur businesses employ over 13 million people, with an average of two employees (including the owner) per business.
  • These businesses are typically well-established and long-lasting. Almost half of the homepreneurs surveyed had been in business for more than 15 years. Only 20% had been in business for less than five years.
  • Homepreneur businesses are as competitive and successful as businesses located outside the home.

According to a news release from the U.S. Census Bureau, the top home businesses are engaged in the professional, scientific, technical, construction, retail trade, and other services (e.g., personal, and repair and maintenance services).

U.K. Home Business Report Highlights

The “Home Business Report,” on the other hand, shares these facts:

  • The recession contributes to the increase in home businesses in the U.K.
  • Most popular factors for starting a business from home are lower start-up costs, better work-life balance, and being close to the family.
  • Home businesses are growing by outsourcing and subcontracting, as opposed to taking on staff.
  • Technology remains a key enabler to starting and growing a business from home.
  • Home businesses are early adopters of social networking sites to keep in touch with other businesses.
  • The number of people holding down a day job and building a business at nights and weekends is increasing.
  • The most significant growth areas are business services such as business consultancy, legal services, accountancy, architecture and design, training, and outsourced services, and consumer services such as arts and crafts, domestic repairs and services, beauty and wellness, tutoring, and caring.

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Starting a Home Enterprise Today

Often shrugged off as sideline endeavors adding little to the family coffers or general economy, home businesses are slowly being accorded the respect that other kinds of small businesses enjoy. Latest statistics show that they are a growing industry that augments, if not completely provides, the income of households as well as contributes to economic prosperity.

For workers who wonder when might be the best time to join the home business market, now seems an opportune time to do so. The combination of technological advances, low operating costs, and increasing acceptance of this sector tilts the odds in favor of the aspiring home entrepreneur.