So what they should do is work with someone like us, somebody who's been down all the paths and actually owns a franchise today. We have our own nine-step proprietary system that we guide you through to really help you learn about exploring franchise business opportunities and ultimately find the one that's going to be a great fit for you.

What would you say is the biggest mistake that many people make when they're first exploring franchise opportunities?

The biggest mistake that we’ve seen in talking to candidates about franchise opportunities is they'll come on all gung ho in that first call and they'll be like guys we're ready to buy a franchise. We want to do a Dunkin Donuts because we love donuts. 

Please DON’T DO that either. In most cases, you don't know what you don't know. It's one of those things where we’ll just give it to you from our experience when we went through this exact process 17 years ago with our current franchise that we still own today. If you told us then we would end up acquiring a Hawaiian Coffee and Smoothie franchise, we would've told you you were absolutely crazy. But what we did do was go into this process with an open mind. 

We looked at many concepts, we narrowed it down to three and we did our due diligence and this is the one we ended up with. It was certainly not what we had in mind when we started. So we just say, keep an open mind about franchises because it may be there's a better fit for you based on your “why”, what you're trying to accomplish than the one that you think is the most obvious.

Two candidates we worked with recently one ended up in a mobile pet grooming franchise. They came in and they knew they loved pets, but they just didn't know what was out there. So just like we never knew that there was such a thing as a Hawaiian-themed Coffee Smoothie franchise. They never knew there was a mobile grooming franchise. 

Another candidate we worked with kind of knew they wanted to travel. There why was they wanted some freedom and flexibility. They had no idea there was a travel agency that was a franchise or business opportunity. So come in with an open mind. Almost all the candidates we work with end up in a business that they never even thought of, never knew the name of and never had envisioned themselves in it. 

Key points regarding franchise business opportunities.

1. If you're going to look at franchise opportunities go in with an open mind, and be willing to learn and explore. 

2. Don't do it on the internet. 

3. Really pay attention to people that can help you. We are franchise consultants, or we like to call ourselves franchise placement specialists, and we're like a realtor for franchises. When you're going to buy your dream home, you work with a realtor. If you're serious about finding the business of your dreams, work with someone like us. We're going to help you get clarity on your why, help you understand all the documents, and make that front-of-the-line introduction so you can get your questions answered. 

4. Ultimately make sure that whatever business you end up checks all the boxes for you and answers your “why” you want to own a business. 

So in kind of summarizing what we talked about today, it was really franchise business opportunities. We shared some fun stats. We talked about what a franchise is, the basics of what you get when you're investing in a franchise and what that monetary investment level can look like. Some of the mistakes we've seen people make and also why (after they make all those mistakes) they end up working with someone like us. If that’s you, don’t be shy, please feel free to reach out to us with and questions or concerns regarding franchise business opportunities.

Here's a simple way to think of Item 23. When you invest in different types of investments many times they will give you a disclosure. They have to disclose pertinent investment information about the background of whatever you're investing in. Generally, they don't make you sign per se that you've received it. 

So it’s the same thing with a franchise except they must have a receipt that you received the FDD that is signed and dated so that starts the clock that gives you 14 calendar days at a minimum to review it. During this period the franchise can then not contact you, even if two days later you're just gung-ho, ready to go, here's my check, I'm ready. The franchise cannot accept it.

The franchise is legally bound to wait a minimum of 14 days which is generally referred to as the “quiet period”.  This gives you time to really review the FDD without any contact from the franchisor. Then you can move on, do your final due diligence and become a franchise owner in the business of your dreams.

We know that the Franchise Disclosure Document (FDD) is NOT the most exciting topic in the world, but very important to the process of acquiring a franchise. This one is the final Item of the FDD and it's the most important one. Again, we stress, It's not a legally binding document that you have to acquire the franchise.  If you're uncomfortable in any way signing Item 23, the receipt, you should contact a legal professional to get additional advice on this and anything else about this document that you might be unsure about. 

The Franchise Disclosure Document (FDD) can seem big and overwhelming, but think about it, in no other business model do we know that you get such robust in-depth factual information to help you make an informed decision. Please know that we are here as your expert franchise matchmakers to help you along the franchise roadmap so that you can make an informed decision and hopefully find the business that is a really great fit for you. Please feel to reach out anytime.

What Should You Pay Particularly Attention To In This Item?

You should have an attorney review it, of course. One thing to note, if you've been following along with us, is you'll recognize that a lot of these agreements/contracts were disclaimed previously in other items of the FDD. So it's not like it should be a surprise. This is all of them all put together for you. We do highly, highly recommend that you seek the advice of a qualified franchise attorney and or other professionals such as an accountant, to help you evaluate this document and particularly the contracts and the numbers in this document. 

Please don’t hesitate to reach out to us with questions if you are in the process of reviewing a Franchise Disclosure Document. We are here to serve.

So you're going to see a lot of different numbers if you're looking at different franchises. The one very important thing I do want to suggest to you is that you make sure that these statements are audited, meaning that these are audited financial statements by a reputable entity. This document is reviewed by the Federal Trade Commission (FTC), but we don't believe they necessarily require that these financial statements be audited.

What Other Parts Of This Item Are Important?

There's not really much you can do with this section. You're not going to go play accountant and say, well, I want to know why this line item says this. Doing so is not going to kind of present you in a positive light to the franchisor, but it's just to help you understand, is the franchise that you're about to sign a franchise agreement in good financial health. Unfortunately, it does happen once in a while that they are not. Franchises grow too fast or they're undercapitalized and they can run out of money. So you just want to make sure that the numbers on those financial statements just make sense, and are there any blaring red flags.

This was one of our favorite items because it was short and sweet, the financial statements of the franchisor. 

If you have questions about this Item or any other items of the Franchise Disclosure Document please feel to reach out to us.  Of course, the advice of a Franchise Attorney is always highly suggested.

 The third one has to do with the disclosure and the changes in the status of the franchise-owned outlets located in a state for each franchise for the last three years.

So this one is a little different than the other two in that it's got a lot more variations to what the franchise status is within the numbers. It's going to show it for the past three years so you can see trends over time. Basically, it's going to say, how many outlets were open at the beginning of that year. And then how many new ones might have opened. Did any terminate or close? Did any decide not to renew? Did any get acquired by the corporate entity (the franchisor)? Did any of them cease operations for any other reason? At the end of that, when all that math is done, how many outlets were there at the end of the year? You're going to see that broken down by state over a three-year period. So you should certainly look in your state and the areas around you to see what kind of trends are happening. There might be some insightful things happening, especially in seasonally related types of franchises. So what you hope to see is it trending up. Is there a kind of plateau? Is it decreasing? And you may actually see areas of opportunity that could mean, gosh, there's nobody in my area. This is a great opportunity to come in and dominate.

The next one is the fourth table, and it's the franchisor must disclose the status of company-owned outlets in each state for the last three fiscal years. 

And this is the same kind of breakdown where it's got multiple statuses, but this is the franchisor-owned units. 

First, these are only company-owned units, and there could be multiple reasons why they're either adding on new locations or getting rid of those locations. One situation could be where the franchisor is selling them to franchisees to take over those locations. Another situation could be that they could be opening new locations because they want to test out new markets before they bring in new franchisees. They may be closing them, or there may be just no market demand, and so therefore they may decide to close some down. So you're not going to necessarily see big numbers. Most of the franchises that we tend to work with don't have a lot of company-owned units. Some of the bigger ones might have as many as 20, but most of the franchises we work with usually have between one and five. So you're not going to see across the whole United States big trends happening in this table.

Overall just look at the trends, but it may be hard to use these trends for the franchisor units since there may not be a lot of them. If one changes, that could have a big impact on the numbers. I think it's more important to look at the franchisee units that have changed status over the particular three-year period. 

The final of them all is the franchisor must disclose its projections of new outlet openings in each state, as well as the number of franchise agreements that have been signed but not yet resulted in the opening of the franchised outlet. 

This one I would look at pretty closely. It doesn't have the details of the previous two, but it has some importance. It's saying how many franchise agreements were signed, but then also how many were opened and that can be a big difference. So a franchise, especially some of these emerging brands, can be really focused on selling franchises. Let's get in there, let's get the territory sold, buy one, get one free, and they're selling large numbers of franchises. However, they are selling these franchise agreements and it'll take a long time to open … two, three years. 

Actually, this happened in our franchise. The franchise was growing so quickly and they were initially an event-based model. The demand for the product was so high that people were constantly saying where's your store? So, the franchise decided, well, we're going to open up brick-and-mortar stores. Well, the franchise really didn't have experience and opening up stores previously, so it was taking them a long time to open them. They had all these new people coming in buying franchise agreements and it was then two or three years later they were opening their doors. So those are the kinds of anomalies that you want to pay attention to.

What's important about this is as you look at different franchises, these numbers are going to be different based on the type of franchise as well. You're going to see more that have been sold and not opened yet in a franchise that's heavily a brick-and-mortar type franchise just because of the time it takes to get everything done, all the permitting, and so on and so forth. Whereas a home services franchise that is home-based, you might be able to get started in a month after training. So there can be a big difference in these numbers with the different kinds of franchises. As a whole make sure that you take that into account if you're looking at a bunch of different franchises that this is not going to be necessarily an apples-to-apples comparison franchise to franchise.

It's a long item. These graphs and charts are very in-depth and provide a lot of good information for you if you're looking and doing your due diligence on a franchise. Certainly, these charts/tables could be tied in with some really good questions that you could be asking the franchisor during due diligence. Referencing these numbers with the franchisees that you're likely going to be talking to (of any franchise) during the due diligence is going to show you know what you're talking about. Read the Franchise Disclosure Document (FDD) and it's going to give you insights that you would normally not get.

As a whole, this is a very insightful item. It seems odd that they kind of put it at the end, but it is right after the financial representations of Item 19 in which it kind of ties in. There's no money here per se, but you do get a lot of trend information and kind of get insights into what's really happening in the franchise both as a whole franchise versus company-owned, and by state. 

If you need any assistance looking over or understanding the Franchise Disclosure Document (FDD) please feel free to reach out to us.

In general, most franchises will only report for those that have been in business one year or more because you have to realize your first year you're ramping up and everybody's going to be in a different situation. So those being in year one year plus, they'll almost always report that data. You may end up seeing the data from 1 to 5 years, 5 to 10 years, and 10 years plus so you can then see any trends or anomalies across that data. 

They generally break it down by region. How does the West compare to the mid of the country or the East Coast? So every franchise can decide how they want to report that. We have found it very interesting and insightful sometimes in helping our candidates understand how those numbers are presented.

Are there any common exclusions found in Item 19 of the FDD?

If there are any exclusions, then it must be disclosed. That's the whole point, the franchise has to be open and honest and they can't kind of hide something underneath the rug, which is great (which may not be true for non-franchise businesses). But if they are intentionally excluding something, then you'll see it denoted in the small print.

So looping this back to our earlier statement about evaluating other types of non-franchise businesses, there's really nothing there governing those numbers (or presentation thereof). It's up to you to prove those numbers yourself. Meaning that there's no governing body overseeing the truth of those numbers showing in any documents provided by the other party. So again, when evaluating franchises, the nice thing about that is the numbers showing in an FDD are all governed by the FTC and these numbers have to be validated/substantiated before they can end up in Item 19. 

What other business opportunities out there give you that opportunity to really know how a business is doing and allow you to substantiate in your evaluation the question “How much can I make”? Or when are you gonna get your investment back? You can use our return on investment calculator, take the numbers from an FDD, plug those in there and you can find out I'm going to break even in one year, three years, five years based on the numbers they're providing me. What a great way to be able to do real due diligence on a business opportunity. 

Additional comments about the FDD Item 19

Of course, this item can seem very overwhelming in almost all cases. It's going to be the longest section of the FDD (most likely) and it's absolutely one that you need to pay particular attention to. You can, and should, use the Item 19 numbers when you get to the stage of validation and start talking to other franchisees to ensure that those numbers are valid and make sense. As you build your pro forma and business plan, you'll feel a lot more confident in plugging those numbers in after discussing them with other franchisees. So you absolutely want to validate these numbers when talking to the other franchisees as part of your due diligence process so you have the best opportunity to evaluate whether or not this is the right franchise or business opportunity for you.

In addition, we want to make clear to our audience that the Item 19 numbers are just a representation, although it comes from real accurate information, it is NOT A GUARANTEE. So if you see that average sales in a certain franchise you're looking at are $1.7 million, it doesn't mean that you, in particular, are going to make $1.7 million. It's NOT A GUARANTEE. Make sure you do your validation and work with someone such as us who can help you dive deeper, understand the numbers, and understand how you make money. 

We have a statement that we always share with our candidates, which is “gross is for vanity, net is for sanity”. So some franchises, they'll focus so much on the top line, you can make $3.5 million, but what's going into your pocket? So always try and get those net numbers. Many times franchises do share that in Item 19 and sometimes do not. 

So final disclosures. We are not franchise attorneys or accountants. As part of your due diligence, if you are not a financial person, please seek advice from professional advisors such as an accountant or a franchise attorney when evaluating any legal document including the Franchise Disclosure Document Item 19. Feel free to reach out to us regarding questions regarding FDD Item 19 or need assistance in determining if a franchise is truly a good fit for you.

Fortunately, we started off with a three-unit because we outgrew that easily in the first six months. We had three units in the first six months. And eventually, we ended up, and we talked about this in previous episodes of the Franchise Disclosure Document about transferability. We had another franchisee approach us that had an Empire Builder that they were willing to transfer to us, which was 10 units in our franchise. So we ended up acquiring 13 units in the first year that we were in our franchise, a long way from a single unit. 

Now in other franchises, these units may be represented by different territories (or locations). It’s a very true reality that if you're in a hot area and you're going into a franchise that's popular or “a hot franchise” and you really believe that eventually, you're going to want to your operations beyond just that one single area, then you probably want to look at a multi-unit franchise, or in this case, a multi-territory franchise.

Here's an example. You are right here (pick a great location or zip code in your area), you own this territory. If you don't claim the adjacent territories/zip codes and it's a good hot-growing franchise, somebody will probably come in and take it. Do you really want that? You might then end up with these adjunct non-connected territory areas. So, if you're committed to growing and dominating, it just makes so much sense to claim those territories up front.

Think about it, logistically it makes so much sense. If you have a territory right next to your territory, as mentioned, it's great because if many franchises you don't need a separate set of operations or buildings or real estate to operate in the other territory that you acquired as part of a multi-unit investment. What can happen is if you don't lock in that adjoining territory, and often does, you could still probably get other territories, but it could be 30 miles away, it could be 50 miles, or it could be another city in some cases. 

Therefore, it’s really important that you at least understand what multi-unit means when you're looking at franchises. It's probably a good idea to ask questions regarding do they have multi-unit available availability in your franchise investigations. If so, you should highly consider possibly stretching a little bit and acquiring a multi-unit franchise if you really believe that you're going to go pretty hard and fast (all in) into that particular franchise.

One huge benefit is that multi-units often give you a much better saleable asset. At the end of the day, a lot of people look at franchising because they're looking to grow it and have something at the end of the road that's a sellable asset. Also, when you think of the economies of scale, it just makes so much sense because let's say a one-unit franchise may be $30,000, but then you can get two for $50K and then you might be able to get 3 to 5 for just an additional $10K more. Most candidates that we work with need some kind of funding anyways to acquire a franchise, and if you stretch just a bit and can get approved for just that little additional bit more, 10, 20, $30K more. You are usually better off getting that territory now because if you only commit to the 1 and then in 3, 4, 5 years you're doing well and you decide you do want to grow, well guess what? You're going to have to start all over again with another single unit. 

Obviously, the economies of scale make a lot of sense in multi-unit franchises and in the asset category when you acquire multiple territories, somebody coming in from the outside is probably looking at it in some ways the same way you might be. Hey, I'm not just buying this one little territory, I'm buying this whole area and getting 10 of these as part of this transfer of ownership of this franchise. Therefore that asset, in general, would probably be worth more in that particular type of transfer. 

Again, you should really understand what multi-unit means, depending on the franchise that you're looking at, do they have it available? Do they offer multi-unit? Some of them do not and will only let you start with a single unit. You have to earn your wait and/or earn more units. Some of them actually have some pretty good promos where they'll actually offer, if you buy one territory, we'll give you a second one free. If they do, you might want to take them up on that offer because getting these extra quote-unquote units or territories can be really important in the growth of your franchise and the operations down the line.

If you're coming in with an empire-builder mentality, and you're not just looking to do a business to buy yourself a job, you're looking at multi-units because you want to grow and scale and become and dominate an area. By you sticking your stake in the sand and saying, we're going to own this area, it's actually a great way to kind of keep the competition out. If you're with a really good franchise that has good marketing systems in place, you guys are going to own and dominate the area. So think big, think empire builder, think multi-unit.

We highly encourage you to take a look at multi-units when acquiring a franchise. If you're investigating a franchise, even if you don't decide to go this route, it's good to know what's available. If you would like any assistance in learning more of the benefits of multi-unit franchises please feel free to reach out.

Financial Obligations to the Public Figure from the Franchise

We will go through what this means as far as Item 18. It just means that if there's a public figure noted in Item 18, this subsection will denote if they're being paid, how much they're being paid, are there royalties or fees. It's basically going to delineate any payments that they're receiving for their involvement in being a public figure for that franchise.

Public Figures Involvement in Management

This gets a little bit deeper in the next particular point, and that's what is the public figures involvement in management and control of the franchise. It's just basically denoting if that public figure has any management or control in the day-to-day operations of the franchise, that could be important to know, because if you have a philosophical difference with this public figure, but they have a lot of involvement and/or financial control in that franchise you need to consider that as part of your decision to acquire that franchise.

Franchisors' Control of Public Figures Information

FDD Item 18 is going to delineate what the franchisor can or can't do, especially related to its franchisees. So the franchisor may say because we have Shaq who is a public figure, then you can, and/or maybe you can't use Shaq's name, logos, and trademarks references in your local marketing. So that would be important to pay attention to in this section.

If you have any questions, comments or suggestions about Item 18 or the Franchise Disclosure Document, please feel free to reach out to us anytime. 

Finally, the best advice we can give to our viewers and listeners is to work with someone such as us, an expert Franchise Consultant, who can help you evaluate and understand the FDD, understand how it will impact you, and ultimately help you achieve the business of your dreams.

The next part of Item 17 that's usually covered is transferability

So a transfer is when you transfer or aka sell your franchise to another person who may be taking over your operations. Many times this will happen because let's say you might be four or five years into your franchise agreement and then something changes. Maybe your spouse is moving across the country and you've decided to move your family. Well, you're not going to be able to operate your franchise from there. So you've decided you're going to sell it. In this case, it's just called a transfer. And this section of the FDD will delineate what and how the regulations are involved. 

Many times you may need to notify your franchisor that you intend to sell. Many times there will be some fees involved in this because the franchisor will have to do some administrative and legal work in order to get the new person all up and running. It will also likely delineate if they are just taking over your current franchise agreement or they're going to get a brand new franchise agreement with a new extended term. So make sure you look at and understand the transferability because that's going to impact how and the price for which you sell your business.

As part of Item 17, there typically is some language generally around dispute resolution

So Item 17 in relation to is what will happen if there are any disputes on either side? The good news is really your franchisor doesn't want to get into a legal battle with you, and you should not want to get into a legal battle with the franchisor. They want happy franchisees, but if and when there is ever a dispute, it's going to be delineated in this section how that gets resolved. 

In most cases, it's going to be some kind of arbitration or mediation so that you can hopefully take care of that situation without having to get involved in the courts. What you should be aware of, however, is that all of these agreements, including the Franchise Disclosure Document, are going to be written in the franchisor's favor and will likely say that the state of law that is regulating it is going to be where the franchisor is domiciled. As an example, we are located in Maryland, but our franchisor is located in Arizona. So if there were ever a dispute, we have to really deal with the Arizona law, not the Maryland law. So just something to take into consideration because each state does have different rules and requirements.

Hopefully, you'll never get to that. Most of the time all disputes and stuff are negotiated/arbitrated out. Very few ever make it to full-blown having to go to court and defend yourself. 

Tips on how they can get the most out of this information

The most important thing is what we alluded to in the beginning and that is to take a long-term view. Think about what your long-term game is, what's your exit plan? Do you plan to renew and stay in your business for the long term? Are you trying to build it up into a saleable asset? Are you going to transfer/sell it? What is your long-term game? And then understand how the language in Item 17 will impact you based on that decision. 

We would, of course, also encourage you to have a lawyer and or an accountant review this section with you as well (we can provide some recommendations if you need assistance here). When it relates to the FDD, it's not as important to have a lawyer involved at this point because this is just a disclosure document, it's not really a legal document at this stage. But when you come to the end of that road and you're going to sign a franchise agreement, the FDD actually then becomes the franchise agreement and you are really going to want to understand Item 17. 

Finally, the best advice we can give to our viewers and listeners is to work with someone such as us, an expert Franchise Consultant, who can help you evaluate and understand the FDD, understand how it will impact you, and ultimately help you achieve the business of your dreams.

Restrictions of a franchise that requires you to offer all of their products without limitations 

This would mean that you're required to offer them on your menu of services or products, regardless of whether you want to or not. There are two sides to it, but that's the keyword. All goods, products and services. So whether you want to or not, in this item, it's delineating that you may have to agree to sell all of it. 

Sometimes this can become an issue for organizations that are open seven days a week. Some people may have a bias towards being open on a Sunday or being open in the evening, certain hours. Or I'm gluten-free, so I can't offer things that have gluten in them. Whatever your reason is, it doesn't matter if the franchise says you have to offer all of it, you must offer all of it. 

On the other side of it, there are many franchises that kind of have a mandate of offering a core set of goods, products, and services, and then have items that are optional. This is good in a situation where it may be local or regional. Thinking about this in our coffee smoothie business, they gave us a lot of freedom and flexibility in this regard because they may have mandated that coffees and smoothies are mandatory, but we could pick the flavors. Or we could come up with a fun name for it that had a Hawaiian theme to it. So there were some things that were optional even in our coffee smoothie business. For example, catering as a business model wasn't mandated and definitely not offered by all franchisees of the system. It was an optional thing that you could decide to invest in and snap that onto your business.

Item 16 lays out the flexibility that you have of offering additional or having to offer all of the products and services of a particular franchisor. 

Winding it up now with number three. 

Does the franchisor have the right to expand the product offering in any way? 

This came into play in our own franchise for certain. We have been in this franchise now for 17 years, but the products and services and even the business model have evolved moderately over that time. When we first came into the franchise, they did not have a brick-and-mortar. We were one of the first to have a brick and mortar. They didn't have a food truck. We were one of the first to have a food truck. They expanded the menu to include Hawaiian Shave Ice. That was a product that customers were clamoring for, but we couldn't offer it because it wasn't an approved item. So these are just a few examples of how over time, especially in an emerging franchise, those products and services will likely morph a good bit

The FDD Item 16 typically spells out whether they can morph at all, meaning is the franchise even capable of adding products or services. So if you're looking for a franchise that is going to be a little bit more lenient as far as adding products, then certainly this clause would have to be there for them to be able to add that to their list of products or services. 

So that's really all we have for Item 16 of the FDD. We're going to keep marching forward. If you want a hand understanding the Franchise Disclosure Documentplease feel free to reach out to us anytime. It’s always suggested that you seek legal council in evaluating any legal documents such as the FDD.