Here we're continuing with dissecting the items in the Franchise Disclosure Document (FDD) and we are reviewing the basics of Section/Item 8.
We want to start with one clarification. One of our listeners actually made us aware of a correction that we probably should make, we've been referring in the FDD to the different parts of it as "sections." It's one of those things that we’ve seen in different terms, but most people refer to them as items. So we're going to refer to them as sections slash items or items slash sections. So anyway, we just wanted to make that clear before we dig into further sections/items within the FDD.
So item number eight is the restrictions on the sources of products and services. And basically, section/item 8 tells whether the franchise limits the suppliers from whom a franchisee can purchase goods. Overall, this has two parts to it. One is they must disclose if there are restrictions, and we certainly know about this from our franchise, and they must also disclose whether or not they are economically benefiting from those purchases in the section.
So what is important in this section/item, we would say, first off, this section should provide no surprises if you're doing your correct due diligence, which is why it's so important to work with someone such as us to help you through that process. The great thing is, is that all this information is laid out for you. When you're buying an existing business, are you going to get this information? Likely not! So section/item 8 is going to share with you who you're going to have to buy your products through. Maybe not necessarily how much they're going to cost, but who, and who gets any economic benefit from it.
Here are some basic guidelines for how this works in our current franchise. In our current franchise that we've been operating for 16 years, their entire revenue model, versus a traditional royalty model, is based on the premise we have to buy the product, or I shouldn't say all of the product, but the main product through them that is in their name brand and they charge us a quote-unquote ad fee for purchasing this product. That in and of itself is somewhat higher than what you might pay in royalties percentage-wise, but when you work the numbers out on the other side, it actually ends up for us less than if we were paying the traditional royalties that some of the franchises charge. So this would be laid out in section/item 8 in the FDD for the franchise that we acquired.
So think about it. If you're going to need to buy equipment, and likely you are. If you're going to need to buy product. Whatever you're going to need to get your business up and running, section/item 8 is going to delineate what you must purchase through the franchisor and if there's any economic benefit made to the franchisor and or any partners who they work with to get that.
Super, super important that you read and understand section/item 8 in the FDD.
So what is important in this section/item, we would say, first off, this section should provide no surprises if you're doing your correct due diligence, which is why it's so important to work with someone such as us to help you through that process. The great thing is, is that all this information is laid out for you. When you're buying an existing business, are you going to get this information? Likely not! So section/item 8 is going to share with you who you're going to have to buy your products through. Maybe not necessarily how much they're going to cost, but who, and who gets any economic benefit from it.
Here are some basic guidelines for how this works in our current franchise. In our current franchise that we've been operating for 16 years, their entire revenue model, versus a traditional royalty model, is based on the premise we have to buy the product, or I shouldn't say all of the product, but the main product through them that is in their name brand and they charge us a quote-unquote ad fee for purchasing this product. That in and of itself is somewhat higher than what you might pay in royalties percentage-wise, but when you work the numbers out on the other side, it actually ends up for us less than if we were paying the traditional royalties that some of the franchises charge. So this would be laid out in section/item 8 in the FDD for the franchise that we acquired.
So think about it. If you're going to need to buy equipment, and likely you are. If you're going to need to buy product. Whatever you're going to need to get your business up and running, section/item 8 is going to delineate what you must purchase through the franchisor and if there's any economic benefit made to the franchisor and or any partners who they work with to get that.
Super, super important that you read and understand section/item 8 in the FDD.
What's Your Next? - Podcast
 | Author BioI’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. |
