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Decoding the Franchise Disclosure Document From A to Z – Item #20

The first question on any prospective franchisees mind should be, ‘Would the franchises current or former franchisees invest in them again?’

If you’re not asking this question, you’re not asking the right question!

Arguably the most critical Item in the entire Franchise Disclosure Document, Item #20 reads like a chart, providing you with accurate data on every franchise location that has opened or closed in the past three years.

And, yes: they are required to provide this information so it makes up for the disappointment of #19!

What you’ll find:

• Number of franchises that have been opened, closed or transferred in the last three years
• Growth charts
• Full list of current and former franchisees!

Why is this important?

If you fail to conduct every other bit of research before you invest in a franchise system, at the very least you should take advantage of Item #20 to contact current franchisees and ask them questions.

Are they happy with their investment?

Are they profitable?

Do they feel that the franchise was honest in their recruiting and marketing efforts?

Would they recommend the franchise model to a friend?

To be even more specific, be sure to ask them about issues covered in Item #11.

Nobody can – or will – give you a more authentic assessment of the franchise ‘opportunity’ than those who have already invested their hard earned cash in the system and experienced it themselves. You’ll learn what it’s really like to be part of this franchise – straight from the horses’ mouth!

It’s like decision-making gold.

Before you start checking names off the list though, download our Free Guide highlighting some of the keys to franchise success.

As always, there are some traps to look out for as well.

If location closures are occurring more often than new openings, then the charts will show that the franchise is shrinking – not growing. This is a big indicator that the franchise model is losing popularity, struggling from within, or experiencing other setbacks, none of which is good for you as an investor. You need to get to the bottom of the drop in locations.

That said your primary red or green flags will come from the former and current franchise owners whom you contact. Most will be direct and give you a full picture of the business – the good, the bad and the ugly. If the bad and ugly outweigh the good, and more franchisees are frustrated than not, then it might be time to contact a franchise lawyer to learn more about your potential investment.

The bottom line is that Item #20 provides very useful information. Take advantage of it! Don’t miss this opportunity to have candid conversations with the brave franchise owners who blazed this trail before you.

We’ve only got three left in our FDD countdown! Next week, call your accountant – cause you’re going to need him!

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