We are onto Day Two of our mini-series on How to Franchise Your Business. On Friday, we discussed the various ways you will need to prepare your business before you franchise. While these preparations are technically just suggestions, they are crucial to lay the proper foundation for your franchise system. If you have not had a chance to read Friday’s post, click here to catch up. You will want to know this information before moving onto step two.
For those of you who are caught up, step two to franchising your business is drafting the Franchise Disclosure Documents. Without this legal documentation, you cannot be a franchise. Not to mention, there are criminal and civil statutes that apply to franchising – specifically with how they are set up and how they are registered. It is for this reason that we implore you to seek a professional to assist you in drafting the FDD to ensure that all requirements are met. But even in working with a franchise professional to draft these documents, you will still need a basic understanding of what they are and what they include. To give you a basic overview of the twenty-three federally-mandated items an FDD must include, see our guide below:
Item 1: An overview of who the Franchisor is including background information and any organizations related to the franchisor.
Item 2: A detailed explanation of the business experience of the franchisor’s directors, principal officers, and any other individuals to give your corporate employees some credibility.
Item 3: A disclosure of any lawsuits involving the franchisor, any individuals involved with the franchise system, or other related entities.
Item 4: The history of any bankruptcies involving the franchisor, its affiliates, predecessors, and parents.
Item 5: The initial fees a potential franchisee will be required to pay for goods and services received from the franchisor before the franchised business opens.
Item 6: A list of any other fees that will be paid to the franchisor such as royalties, advertising, and transfer fees.
Item 7: An estimation of the initial investment it will take to open the franchised business given by the franchisor.
Item 8: A list of approved suppliers and any restrictions on sources of products and services to comply with brand standards.
Item 9: An overview of the franchisee’s obligations which could include a lease, fees, advertising, insurance, etc.
Item 10: A description for how the process of a financing arrangement made at the request of the franchisee will work.
Item 11: An overview on how the franchisor will assist the franchisee when running a franchise location including things like advertising, computer systems, training, etc.
Item 12: A description for the requirements of where a franchised business may be located and any other conditions pertaining to the location.
Item 13: An explanation on how franchisees may use any trademarks for the franchised business including the name and logo.
Item 14: An explanation on how franchisees may use any patents, copyrights, and proprietary information owned by the franchisor.
Item 15: An explanation on the requirements for a franchisee’s participation in the actual operation of the franchised business.
Item 16: A guide on the restrictions and allowances for what franchisees may sell in the franchised business.
Item 17: An overview on the process for renewal, termination, transfer, and dispute resolution within the franchised business.
Item 18: A disclosure on any public figures who lend their name or image to the franchise, controls or manages the franchise, or invests in the franchisor.
Item 19: An optional item to the FDD that discloses very specific criteria for how a franchisor can make financial representations of the franchise system’s profitability.
Item 20: A disclosure on the statistics of the number of franchised and company owned-outlets and contact information for current franchisees within the system.
Item 21: A disclosure of any financial statements audited in accordance with generally accepted accounting principles.
Item 22: A large section containing all proposed agreements relating to the franchise offering.
Item 23: A receipt section that contains the titles of all attached exhibits and a section for the potential franchisee to sign if they so choose.
As you can see, this is a lot to consider. Without the proper guidance from business professionals who can assist you with an analysis of your business and advise you on the different figures and statistics needed in your documents, registering your business as a franchise will be nearly impossible. In the meantime, you can be thinking through what it took to get your current business location(s) up and running as this will help influence much of the content for the FDD.
