The Franchise Disclosure Document - Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest.
Business Background - This section identifies the executives of the franchise system and describes their experience. Pay attention to their general business backgrounds, their experience in managing a franchise system, and how long they’ve been with the company.
Litigation History - This section discusses prior litigation whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for or settled civil actions involving the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance.
This section also should say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.
Bankruptcy - This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy, information that can help you assess the franchisor’s financial stability and whether the company is capable of delivering the support services it promises.
Initial and Ongoing Costs - This section describes the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. In addition, ask about:
* continuing royalty payments
* advertising payments, both to local and national advertising funds
* grand opening or other initial business promotions
* business or operating licenses
* product or service supply costs
* real estate and leasehold improvements
* discretionary equipment, such as a computer system or a security system
* legal fees
* financial and accounting advice
* the costs of compliance with local ordinances, zoning, waste removal and fire safety codes
* health insurance
* employee salaries and benefits