Aspiring franchisees need to have a thorough understanding of the Franchise Disclosure Document (FDD) before investing in a franchise. The FDD is a legal document that provides essential information about the franchisor, the franchise system, and the franchise agreement terms. It helps potential franchisees make informed decisions about investing in the franchise. However, some sections of the FDD can make or break getting the desired real estate space. In this article, we’ll discuss the critical items in the FDD that franchisees need to review before signing a lease.
Important Details about 5 Items in Your FDD That Can Make or Break a Real Estate Deal –
– Franchise Disclosure Document (FDD) provides information about franchisor, franchise system, and agreement terms
– FDD helps potential franchisees make informed investment decisions
– FDD sections important for leasing real estate:
– Item 1: Business experience of franchisor’s key executives, bankruptcy or litigation history, marketing materials for landlords
– Item 7: Estimated initial investment, proof of funds needed for build-out
– Item 12: Territory where franchisee can operate, protection and exclusive rights vs larger pool of real estate options
– Item 17: Franchise length, renewal options, make sure lease matches confirmed rights to franchise
– Item 19: Optional financial performance information, must be based on actual data from franchisees, valuable tool for evaluating return on investment and profitability
– Landlords consider franchise brand’s use and success before leasing
– It’s important to sell the franchise concept to potential landlords after purchasing the franchise.
Essential Sections of the Franchise Disclosure Document to Consider When Leasing Real Estate
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A Franchise Disclosure Document (FDD) is a legal document that contains information about the franchisor, the franchise system, and the franchise agreement terms. As mandated by law, the FDD must be provided to potential franchisees by the franchisor, and it is highly recommended that a potential franchisee have a franchise attorney review it.
The FDD helps potential franchisees make informed decisions about investing in the franchise. It contains many essential items for consideration, and here’s a list of the sections in the FDD that can make or break getting to lease your desired real estate space.
Item 1: Business experience
This section provides information about the franchisor’s key executives, including their business experience and any bankruptcy or litigation history. For potential franchisees, it’s essential that a franchise has a good story, and most landlords will also want to know about the franchisor’s background.
It’s a good idea to ask to see the franchisor’s marketing materials prepared for landlords. This information will contain the company’s success stories, details on the current state of the brand, and information on the growth plans of the company. It can also include specifics on existing locations, high-quality images of existing locations, and high-quality images of product or food photography.
Item 7: Estimate initial investment
Item 7 covers the franchisor’s estimate of what a franchisee’s initial investment will be. This item is relevant to landlords since they want to know how much money a franchisee will spend on the build-out of their location. Once a franchisee shares that number, the landlord will want proof of funds. For those who use savings, bank account statements serve as proof of funds, while those using a loan must show a pre-approval letter from their bank.
Item 12: Territory
This section provides information about the territory where the franchisee will be allowed to operate the franchise. Some franchisees have a preference for a defined territory, while others do not. Having a defined territory is an advantage because it provides protection and the right to open where others cannot. However, without a defined territory, franchisees have larger real estate options to search for their location, but must compete with other franchisees for the same properties.
Item 17: Initial franchise term, renewal, termination, transfer, and dispute resolution
Many essential elements can be found in Item 17, but the focus is on franchise length and renewal. For those interested, it’s important to ensure the lease mirrors the time the franchisee has confirmed rights to the franchise. Signing a lease longer than franchise rights is precarious. The initial franchise period needs to be considered when calculating total investment costs.
Item 19: Financial performance representation
This section is optional, meaning franchisors are not required to provide financial performance information. However, if a franchisor chooses to include financial performance information, they must follow specific guidelines set forth by the Federal Trade Commission (FTC). If the franchisor provides financial performance information under Item 19, it can help potential franchisees evaluate the potential financial benefits and risks of investing in the franchise system. Many landlords will ask for details on the average sales of the franchise, helping them decide to lease to the franchise brand. It’s important to note that providing this information can also help the landlord decide on the rent value.
Conclusion
In conclusion, when purchasing a franchise, the franchisee must sell the franchise concept to potential landlords. In most cases, landlords think about how the franchise will benefit their center, just as much as they factor terms of the deal when considering the lease. Therefore, if the franchise has a use that landlords do not favor, or it’s a brand actively closing stores, it might be difficult for the franchisee to secure a real estate location of their choosing.
Overall, it’s important to remember that the Franchise Disclosure Document plays a significant role in leasing real estate for a franchise. Paying close attention to these items can help franchisees make informed decisions and negotiate leases with confidence.