The Franchise Disclosure Document (FDD) Item 3 Explained

15.11.22 09:59 PM By Stacey Riska

The Franchise Disclosure Document (FDD) Item 3 Explained

We're continuing on from previous posts plowing through the Franchise Disclosure Document, also known as the FDD. As we mentioned previously there are 23 sections/items in this FDD. We are going to be reviewing one of the sections, Section 3/Item 3, which is truly what I consider to be very important, which is knowing the good standing of the franchisor that you're about to get married with and any litigation history of that franchise.

So what are some of the things that people might get concerned about if they found things in Section 3/Item 3 that stood out and that maybe are a red flag?

Let's start with the good stuff and why this is such an important section. This is a key reason why we are so passionate about franchises because a franchise must give you this FDD.  How wonderful is it to have information that can help you make an informed decision? Whereas when you're buying an existing business or starting a business from scratch you’re just not going to get this kind of information. So the good news is that in the FDD, they are legally required to lay out in Section 3/Item 3 any litigation that has happened ever since their inception.

That would be to us very important information. To think about the FDD in a way … here's a good analogy … think about Carfax. It's like a Carfax for franchises on steroids, right? It's telling you everything about that particular franchisor, and it's telling you everything legally that you're about to embark on by pushing forward as a franchisee of that franchise. So, in this section, is it really truly a hundred percent going to be a bad thing if some franchisors that you're evaluating happened to have some litigation previously?

Before you decide, we think you should consider what the situation is and why is there litigation. So the litigation could be from a vendor partner, or it could be from a supplier. Most of the time where you'll see litigation in the FDD is if there ever was a franchisee or a group of franchisees, that because of dissatisfaction, decided that the only way to resolve that was to litigate. 

So, especially if it's an emerging brand, and say less than 10 years in existence, and you're seeing more than five cases of litigation, that would be a red flag. You're going to want to understand the dynamics of it. Now, legally, they are required to lay out the case, so you can go and research more about it. But if you see that there's a group of highly disengaged and disinterested and unhappy enough to litigate franchisees, you may want to ask some serious questions about why that is before you decide to move forward with that franchise.

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 Author Bio

I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.
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