When you have strong credit, your franchise's financial...
Reviewing a franchise disclosure document (FDD) from a Canadian franchise can be a bit overwhelming to say the least. It's often a very large stack of papers, and it may be tempting to let your attorney or business advisor handle it. However, you can't rely on other people alone when it comes to examining the very important information contained in this document. The FDD is where you will find all the details of your investment, including requirements, and it deserves your full attention.
To start, take the FDD apart and break it down into smaller sections. A large section of this package may be the actual franchise agreement and other related agreements you will eventually sign, but put those to the side for now. Focus on the smaller disclosure document body and any schedules or exhibits attached at the end.
One of the attached exhibits should be a list of current franchisees and their contact information, although if you're in a smaller province, the list may be limited to franchisees in a specific geographic area. This is very valuable information, and you should contact the franchisees on that list. While you may have received some franchisee names from your franchisor to contact, remember that they are hand-picked by the brand, so you should also speak to a broader cross-section of franchisees in the system.
Prepare a list of questions in advance before you go to visit the franchisees. Some of these questions will be about things not found anywhere in the FDD, such as financial returns, and you may have to be creative in how you ask for this data because of its sensitive nature. The FDD should contain detailed information about the costs of franchise establishment, but to double check this, you could ask a current franchise how well the franchisor has been able to predict costs and open new locations while staying on budget. Franchisees can also offer valuable information about the current state of the franchisor-franchisee community relationship.
In the FDD, you'll find the number of franchises that were transferred or closed in recent years, along with contact information for franchisees who have exited the system over the last year. If the number of transfers or closures seems high when compared to the system size, you'll want to dig a little deeper into this area by speaking to the franchisor and other franchisees about it. Speak to the franchisees who left to see why they left and what they have to say about the system.
A particularly important section--or lack thereof--in the FDD that is often overlooked involves territory rights. Carefully read through the FDD to see if you have any rights to an exclusive operational area and what the franchisor's policy is on preventing encroachment on your sales and location.
The FDD is meant to give you all the information about the franchisor and the franchise so you can make a fully informed decision before you decide to invest your money. Work through this document one piece at a time, and then review the document with an attorney and a business advisor to ensure you understand it completely.