The Franchise Disclosure Document (FDD) Item 4 Explained

15.11.22 10:00 PM By Stacey Riska

The Franchise Disclosure Document (FDD) Item 4 Explained

We are still dissecting the Franchise Disclosure Document (FDD). These 23 sections/items of legal information are critical to making a decision about whether or not to acquire a franchise. We've been through the first three sections/items in previous posts so check them out. 

If you want to learn more about what the FDD is, and why it was created, go back to the first episode which kind of gives you the history and what it's really about. Now we are covering bankruptcy, and what specifically we're talking about here is has the franchisor been involved in some type of bankruptcy

This one's a pretty obvious one. If the organization were to have been involved in a bankruptcy prior that would be a red flag.

We've been in business before, multiple times, and we know how difficult it can be, and sometimes bankruptcy may just be the most logical solution to kind of move on to the next chapter of their life. And for a franchise, that may be the case as well. They may have put their stick in the sand, or their flag in the sand, saying we're gonna franchise and then they grew so quickly that they ran out of money and then couldn't support their existing franchisees. 

We've seen it before, and they have to go bankrupt or dissolve the franchise and kind of start over. So looking at section one/item one, section two/item two, section three/item three, and section four/item four. These are giving you this high-level history, so to speak, of the franchise. And isn't it great to understand some of the financials of that franchise?

You're going to want to make sure that the franchise that you're going sign that agreement with has money. Money to invest, money to support, and money to continue to grow. And I do believe that the franchise is legally required to include its profit and loss statement as part of the FDD and franchise agreement so you'll have an understanding of what that looks like. 

A company that is losing money is not always bad, not by any means. We know that many times it's because you're investing money in the growth of the company, but make sure to look at the debt. Look at how many new franchisees they're bringing in over a period of time. 

If they're currently in bankruptcy proceedings, yeah, I would probably run. If it's something that happened five or ten years ago and has now been dissolved and they kind of restructured and got their act together, then you might want to ask the franchise some questions about it.

What happened? What did they learn from it? But it's not always a bad thing. Again, it's not always only bad businesses that go bankrupt for many, many reasons. Some of them are not even their own fault. There's just risk in being in business. 

We know something like bankruptcy is not all that exciting, but it's super important that know whether or not the franchise that you're looking at has had some type of bankruptcy in the past.

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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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