U.S. News & World Report:
Reading the Franchise Disclosure Document, or FDD, might not be as entertaining as curling up with a good mystery novel, but it does provide most of the clues you’ll need to find the best franchise for you. And you definitely don’t want mysteries when you’re looking at franchises–you want the most important facts presented to you in plain English so you have what you need to make a good decision.
For just that reason, the Federal Trade Commission requires that all franchise companies provide prospective buyers with an FDD organized into a common format to allow for reasonably easy comparison between franchises. Just think of this as the most valuable written tool you’ll receive in your franchise research stage.
The FDD has 23 sections (referred to as “Items”), as well as exhibits that provide a ton of supplemental information. Here’s a guide to understanding the FDD:
Items 1-4: History
Item 1: A general review of the company, including any predecessors or affiliates, and the opportunity being offered. This key overview of the business is one of the sections you’ll want to review first.Item 2: Background data on key officers, directors, employees and any others who have management responsibility related to the sale or operation of the franchise. It includes a summary of their work experience from the past five years and any other experience they have as officers and/or directors of other companies.
Items 3 and 4: These include disclosures of any past or current litigation or bankruptcy on the part of the company or its key people.
Items 5-7: Fees and Costs… read on.