Published: January 10, 2019

When investigating franchise opportunities, it is important to do your due diligence before signing on the dotted line. It is essential to do your research before making a smart business purchase.  The most essential item to review during your due diligence is the Franchise Disclosure Document (FDD).

In 1978, the Federal Trade Commission (FTC) created consumer protection guidelines that required a franchisor to share information with a potential franchisee before allowing the new franchisee to invest in their system. Originally the FTC called the guidelines “Uniform Franchise Offering Circular (UFOC)”. In 2008, the FTC updated the rules and it became known as the Franchise Disclosure Document (FDD).

The FTC requires all franchisors to provide candidates with their current Franchise Disclosure Document at least 14 days prior to signing an agreement. The information contained in the FDD is vital for all franchise candidates to make an informed and educated decision on their investment.

The FDD contains 23 items that provide information on a variety of areas such as franchise history and background, costs, fees, legal issues and obligations for both parties. While it is extremely important to analyze each section of the FDD, there are ten items in particular that I believe are the most informative when reviewing a franchise system.  Here are some of the key items from the FDD that require special attention:


Item 1: The Franchisor And Any Parents, Predecessors And Affiliates

This section contains general business information and the history of the franchise. Importantly, it will let you know if the franchise previously operated under a different name. This history can lead to an interesting process of discovery. Overall, Item 1 serves as the foundation for understanding the details of the franchise throughout the remainder of the FDD.


Item 2: Business Experience

When you are building your future, you want to make sure it’s on a solid foundation.  During your discovery process, you will meet the franchise development director, operations executive and either the founder or the CEO.  Smaller franchise organizations may have a smaller executive team.  The FDD will include a listing of the top executives and their management responsibilities within the company.

It is important to know the backgrounds of your potential business partners and how they may be able to assist you in the future.  Companies with executive experience in business, management and franchise operations often have stronger, more successful franchise systems. 

Item 3: Litigation

This section contains a list of the litigation the company is currently involved in or has been convicted of over the past 10 years. While a certain amount of litigation may be expected with larger businesses, you will want to pay close attention to the volume and nature of these cases. The first red flag may be raised if you see a pattern of excessive litigation or situations in which the franchisees are regularly suing the franchisor for non-performance. Also, be aware of third-party suits claiming trademark or intellectual property infringements. Any warning signs in this area should be investigated before proceeding with an agreement.

Items 5,6,7: Estimated Initial Investment

This provides a detailed look at the reasonable expenses you should expect to incur and should give you an idea if you can afford to purchase and operate the franchise. While items 5 and 6 provide the initial franchisee fee and other ongoing fees, item 7 includes a comprehensive list of expenses one should expect when opening the business and operating it for the first several months.

Item 12: Know Your Territory

Territory refers to the exclusive area or radius granted to a franchisee to operate their business. This is an important designation because you don’t want to be in competition with a fellow franchisee for the same customers in a given market. Make sure you have a clear understanding of the territory, boundaries, and how they gather their population data.  It can be beneficial to learn if any neighboring territories are available and what would your cost be if you wanted to expand your business.

Every franchise has different territories and industry can also play a role in determining the size. Convenience stores may be located more close together than home repair companies.  However, one sub shop franchisor may grant smaller territories allowing multiple locations within a 10 mile radius.  A mobile ice cream truck franchisor may grant you a territory with 3 zip codes for a population size of about 500K people.  Plus, they may allow you to operate that truck at large public events in a different territory.  

Item 19: Financial Performance Representations

Many prospective franchisees will want to skip to this section in an attempt to get an understanding of how much money can be made through ownership. The problem with that is only about half of the franchisors make limited financial performance representations in the FDD. In order to understand the financial performance of a franchise system, you will likely want to reach out to existing franchisees to discuss finances. This is the best way to build an accurate profit and loss statement.  

Item 20: Outlets And Franchisee Information

This information ranges from the status of franchise- and company-owned units to franchise transfers and projections of growth. Pay close attention to system-wide trends, such as a high level of terminations and abandonments. This section provides three years of data on a state-by-state basis.  If you see any potential data that concerns you, please discuss it with your business broker and the franchisor.   There may have been a problem and it was remedied.  

Item 21: Financial Statements

It’s important to make sure the franchisor has the financial reserves to create a stable growth environment and solid franchisee support services. This section includes balance sheets for the past two years and income statements for the previous three years. If your net worth is greater than the franchisor’s annual gross revenue, you might want to find another franchise to investigate.

While FDDs do not provide information on why or how a franchise system is successful. They do provide a transparent view into many aspects of a company’s operations and documented track record.   It should be used as an important tool for due diligence.  

Read Between the Lines

When you are going through discovery and due diligence, you will also gain an idea how transparent a franchisor is, willingness to discuss your concerns, and your access to leadership.   It’s important to choose a franchisor that is truly committed to your success by providing training, support, and resources to operate and help grow your business. You can also talk to your trusted advisors (franchise broker) certified public accountant and legal counsel) before making a decision.

For more information, feel free to contact Meridian Business Advisors at This email address is being protected from spambots. You need JavaScript enabled to view it..

Published: April 26, 2018

These franchises offer incentives and long-term support to Veterans.  We also have SBA approved lenders ready to qualify eligible candidates.   If you are thinking about buying a franchise, please call our office at 843-800-2148 to schedule a complimentary consultation.  We love to work with Veterans and will go the extra mile to help you with buying a business. 

 

AlphaGraphics has been a leader in print, marketing and visual communications for more than 46 years. With nearly 300 independently owned and operated locations in the U.S. and eight countries, they have set the standard for solutions in printing, marketing communications and document creation and management. Veterans Incentive.  

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Anytime Fitness clubs are open 24 hours a day every day of the year, thanks to security systems that allow members to access the clubs during unstaffed hours. The company, which began franchising in 2002, is expanding worldwide. This business has lower operating costs because of the business model. 

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Archadeck is the world's oldest and largest designer and builder of custom decks, screened porches, open porches, outdoor kitchens, fireplaces and other outdoor living spaces. Archadeck has completed over $0.5 billion in projects for over 75,000 clients since 1980. The chain serves homeowners and builders throughout the United States, Japan and the United Kingdom. 

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Baja Fresh has been serving deliciously fresh, high quality, Mexican food prepared in a quick casual atmosphere since 1990. Baja Fresh is a quality alternative to fast food and casual dining choices. Baja Fresh features a self-service salsa bar and uses no microwaves, no can openers, no freezers, no lard, and no M.S.G.® in the preparation of its fresh offerings. Recently the Restaurants & Institutions Consumers’ Choice in Chains study named Baja Fresh Mexican Grill as the Platinum award winning Mexican chain in America. 

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Complete Nutrition is a network of high quality nutritional supplement retail stores whose mission is to partner with people in their life change to look better, feel better, and perform better. Since 2007, Complete Nutrition has been helping people achieve their health and wellness goals by offering exclusive supplements at affordable prices. Nutritional experience is not required for ownership; they have world class on-line/classroom training program. VetFran member and may offer discounts on franchise fee.  

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Hand and Stone Spa offers massage, facial, and hair removal services, as well as facial products at one convenient retail location.  Hand & Stone offers a recurring revenue model that allows this membership based business to produce a predictable income stream for the franchisee. They also offer more products and services than their competition. VetFran member and offer 20% discount on franchise fee for veterans.

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Huntington Learning Center is the #1 revenue-producing tutoring franchise, with an average earning of 63% more revenue than our closest competitor. Huntington was founded in 1977, began franchising in 1985 and has grown to be one of the most established and well-respected brands in education. Today, Huntington operates nearly 300 centers in 39 states from coast to coast. VetFran member and offer 50% discount on franchise fee for veterans.

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One of the most advanced and admired brands in the commercial cleaning industry, Office Pride provides top quality janitorial services and total floor care through their commitment to honesty and integrity. Franchise Business Review rates Office Pride among the top franchises across all industries in franchisee owner satisfaction for 10 years running. A faith-based franchise that equips people to build a profitable business. VetFran member and offer 25% discount on franchise fee for veterans and active military.

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Repicci's offers a mobile food truck business opportunity selling authentic Italian Ice & Gelato. This is a turn key business wiht unlimited growth potential with several lines of business: tourism, events, sports stadiums, motor sports, schools, etc. They have contracts with professional sports stadiums and arenas.  Join a growing family of franchisees in the United States. Franchise fee discount for veterans.

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TemperaturePro was founded by SystemForward America, Inc., "the Franchise Specialists", to provide reliable, highly trained, mobile technicians to serve customers in a courteous, professional manner. It's a turn key business with unlimited growth potential. They provide top notch services: air conditioning, heating, indoor air quality, energy audits, comfort technology solutions, etc.  

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Published: April 26, 2018

Pride of ownership can make it an almost impossible task for a business owner to value their business.

Having devoted many years as well as blood, sweat and tears into the business, a business owner may struggle to take an objective view on the value of their business.

The business valuation process can be complex, based not just on your bottom line profits, but a multitude of figures and factors – both quantitative and intangible. Financial performance provides an objective and useful insight into material value and history, but it rarely considers the true business opportunity and intellectual property values.

The bottom line is, your business is only worth what a buyer is willing to pay, but a single offer alone does not demonstrate the true value of a business. A one horse race is a sure shortfall and guarantee not to get the best deal for your business; the more comprehensive the marketing, the more potential buyers you will find.

By engaging more than one buyer you create competitive tension which leads to multiple offers and the power of comparison. This comparison allows a business owner to understand the true value potential of their business and as a result secure the best deal possible.

Knowledge really is power when it comes to selling a business. With a better understanding of the sale value your business might achieve via a controlled exit process, you can progress to sale completion in the comfort that you are not selling undervalue.  

INTANGIBLE ASSETS & INTELLECTUAL PROPERTY(IP)

Goodwill and other intangible assets can form a major part of a business’s overall sale value. These intangibles are often not fully understood by either the buyer or seller yet could hold significant value.

• Goodwill & brand recognition
• Trademarks
• Patents
• Copyrights
• Business mythologies

Intellectual Property is essential to the growth and protection of a business. The commercial world is truly global and extremely competitive and any intellectual property your business has created over the years (formally registered or not) makes your business unique, increases value and protects it by creating barriers to entry for new competitors.

Establishing appropriate value for IP can be complex. Helping business owners and buyers understand the importance of a business’s intellectual property is imperative in securing the best deal for the seller. We believe this insight gives Meridian an edge on many other brokers in the market.

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