Choosing to invest in a franchise business is a huge decision. For many, the choice to become a franchisee enables them to control their own destiny and grow a financially rewarding business. To help ensure buyers understand the business they are buying, their obligations, and risk, the FTC required all U.S. franchisors to disclose certain information in advance of investment. The Franchise Disclosure Document and Franchise Agreement should give you a real sense of the business opportunity and financial implications.
There are 23 standard items in an FDD. Franchise Business Review breaks the categories down in this manner:
1. The “Who” Group (Items 1-4). This group consists of information about the identity of the franchisor, its parent companies, its predecessors, and its affiliates as well as any litigation.
2. The “How Much” Group (Items 5-7). This group includes the fees involved in starting and operating the business (franchise fee, royalty fees, advertising fees, technology fees, etc.) and a low-end and high-end total initial investment range.
3. The “Sources of Services and Products” and “Franchisee Obligations” (Items 8-9). This outlines restrictions on the sources and uses of products in the business and a general overview of the franchisee obligations.
4. The “What” Group (Items 10-18). The items in this group discuss what you receive as a franchise owner.
5. The “How it Works” Group (Items 19-21). Here we find information about the company’s financial opportunity and health.
6. The “Help” Group (Items 22-23). These are items where you’ll want the help of an attorney to understand details before you make a final decision.
While all FDDs are laid out in the same pattern, not all are compiled in the same manner. Here are a few pointers to help you understand and decipher the information shared.
Item 3- Litigation
Take time to review Item 3. It details the litigation underway involving the franchisor. Often this will give you a sense of how satisfied franchisees are with the franchisor. Lots of litigation with owners can be a red flag, especially if the concept is under 20 years in franchising. Mature franchisees may have disputes they are working to resolve- ask for insights regarding outstanding litigation and how issues are typically resolved prior to filing suit.
Item 5 ,6 and 7 – Initial Fees and Other Fees
These items should help you understand the financial commitments for starting up your business and the ongoing fees you will be required to pay to the Franchisor or other third parties. This may include your royalties, advertising fees, technology fees, etc. Be sure to read through this carefully, as it can help inform the proforma you will be putting together on the business. Item 6 also includes fees for training (if applicable) and costs to transfer/sell your franchise to another owner.
Item 19 – Performance
Before looking at the performance information, we'd recommend starting by looking at the number of units in the sample. This area of disclosure is meant to show you the performance of franchisees; after all, your goal may be to invest in a proven concept. Each franchise goes about including units differently. Some disclose very few locations’ information – others include lots of locations. To ensure prospective Goldfish owners have a good understanding of the performance of our locations, the Goldfish FDD shows three different groups of locations– new locations, maturing locations, and mature locations, as well as the average in each of these categories. This should allow a prospective buyer to understand the revenue growth curve Goldfish owners have achieved. In the Item 19, we’ve also included revenue broken down by quartiles so you can see what an average owner’s revenue was depending on their business’s maturity as well as the bottom quartile.
“No one goes into business thinking they will be an under-performer, but when we developed our FDD, we wanted potential buyers to have a realistic look at the upside and potential downside to make an educated decision. Our FDD shows a broad sample of our schools, not just a handful, so it’s a great tool for prospects to use as they develop their financial pro forma,” shared Dan Israel, Vice President of Franchising and General Counsel for Goldfish Swim School.
“Goldfish has over 125 locations open and another 120 in development, and we have 12 years of franchising experience. For a new franchisee, this means we have a proven model and reliable performance data to help an owner make educated decisions at each business milestone,” continued Israel. “This track record is something we are proud of and happy to include in a detailed fashion in our FDD.”
Are you interested in learning more about Goldfish Swim School? Goldfish Swim School owners have the opportunity to build a business and scale using best-in-class tools and technology. Set up an exploratory, no-pressure call and learn more today.