The Most Important Elements of an FDD as an Emerging Franchise Brand
Your franchise disclosure document (FDD) is one of the most important pieces of information about your brand’s franchise opportunity you will share with potential franchisees. It provides franchise candidates with valuable insights into your investment opportunity and is a comprehensive outline of brand standards and best practices.
For an emerging franchise brand, it’s critical the information in all 23 items be written strategically. But the parts to pay particularly close attention to regard information on the estimated initial investment, financial performance and franchise system growth. They answer the following questions on every franchisee candidate’s mind:
How Much Does it Cost to Get Up and Running?
Item 7 – Estimated Initial Investment – covers what franchisees can expect to pay to operate in the first few months of owning the business. Some of the initial franchisee expenditures include:
- Franchise fee
- Furniture, fixtures and construction fees
- Leasehold improvements
- Initial inventory
- Grand opening expenses
Transparency on costs is important for emerging franchisors in order to cultivate trust among your pool of interested entrepreneurs and attract candidates that are truly financially qualified. While high costs may give some potential franchisees pause, you can justify the expenses by showing a high return on investment.
Before drafting Item 7 of the FDD, soon-to-be franchisors need to be sure each location generates a healthy amount of revenue. Your concept needs to provide a strong financial return in order to attract potential franchisees. If you are thinking of franchising your business but cannot provide an adequate return in each location, go back to the drawing board before you move forward with franchising.
What’s my Earnings Potential?
Item 19 – Financial Performance Representation – can be very persuasive, one way or the other, depending on the revenue generated by company-owned or franchised locations. If your Item 19 shows strong returns, it can be a powerful selling point in your FDD. It can also make potential franchisees reconsider if they were concerned by expenses in your Item 7.
However, if you’re reluctant to divulge the financial performance of your company-owned or franchised locations, you risk scaring off franchisee prospects. Item 19s that are vague cause franchisors to appear they have something to hide. Item 19s that misconstrue financial performance are an instant red flag.
Again, honesty counts for a lot when communicating with potential franchise owners. Transparency leaves a good impression and may encourage entrepreneurs to continue pursuing business ownership with your emerging franchise brand.
Clarity helps establish a good reputation for your brand in the franchising industry and can make you stand apart from competitors in your segment.
Is the Franchise Growing?
Item 20 – Outlets and Franchisee Information – informs franchise candidates how healthy the franchise system is as a whole and at the state level.
The information in Item 20 should be displayed in five straight-forward, easy to understand tables that show:
- An overview of system-wide locations
- The number of franchised locations transferred to new owners in each state where the brand has a presence
- A summary of the status of franchised locations by state
- A summary of the status of company-owned locations by state
- The projected growth by state for the upcoming year
Along with the number of locations in the franchise system, franchisors must include the name of each franchisee and their address and phone number of each owned location. Franchisors are also required to provide names and contact information for franchise owners who left the system in the last year or who stopped communicating with them 10 weeks or more before the issuance of the FDD. This is necessary for franchisees to conduct due diligence before signing a franchise agreement.
To learn more about the most important elements of the FDD for emerging brands turn to a trusted franchise advisor, Winmark Franchise Partners. With 30 years of franchising experience and more than 800 franchise owners representing over 1,250 locations for five brands, Winmark Franchise Partners can you help grow your brand through sound strategy and expert franchising advice. Contact us here or at (844) 452-4600.