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Decoding the Franchise Disclosure Document From A to Z – Item #2

Item #2 – Franchise Executives Experience

Last week we discussed Item #1 of the Franchise Disclosure Document (FDD), which covers the company’s ownership and history. Item #2 takes that a step further to give you an in-depth look at the business experience of the franchises top executives and management staff, which is just as important as the history of the franchise itself. Anybody who is critical to the success of the franchise should be revealed in this piece of the FDD.

What You’ll Learn:

• The 5-year work history of all executives, officers, directors, management staff, etc.

  • Including a summary of their work history and any other experience they have managing a franchise.

Item #2 is really a resume for anybody who has significant input into the franchises direction, operations, management, finances and marketing.

Why is this important?

In any type of business, leadership is everything. And as a prospective franchisee, it’s critical that you know who the leaders are and where they’ve been. You’re essentially going to invest in the processes, systems and track-record created by the franchises executives and directors. If they’re not successful, you won’t be successful either. And their past can say a lot about their potential.

When reviewing Item #2, be careful to note how many of the executives are new to the franchise, or new to franchising altogether. If you’re looking at a board full of rookies, then you may not be buying the type of leadership that can guide you to success. They’ve still got a learning curve, and you don’t want to get caught in the middle of it. In addition, if any of the executives have a history that includes other franchises, look into those. There’s a reason they left those other franchise businesses. Be sure it isn’t because their past franchises headed south, went bankrupt, closed for business, or had other legal trouble.

As you review the board and executives, also take into consideration the model of the franchise and how much franchisor involvement there will be. If the franchise system is simple then it won’t require a big executive staff, so don’t expect more than what’s reasonable. On the flip-side of that coin, if the franchise concept is more complicated, or if the units are numerous and widespread, then the franchise should have an executive staff to handle it all. In other words, make sure that the number of hands in the kitchen coincides with the size and complexity of the franchise model.

The bottom line is that Item #2 exposes the strengths and weaknesses of the leadership. You want to look for an executive board with both franchising and franchise business experience, because they’ll understand the business from the inside-out. Make sure they’ve got wide-ranging ability when it comes to operating a franchise and a progressive history that shows growth and undeniable achievement.

Next week: Item #3, Litigation involving the company.