While that sounds simple enough, perspective owners need to know exactly what they are buying before signing a franchise sales document. The first step is a meticulous review of the Franchise Disclosure Document, which the Federal Trade Commission requires franchise sellers provide to perspective buyers at least 10 business days before a contract is signed or money exchanges hands.
The disclosure document, which formerly was known as the Uniform Franchise Offering Circular, contains information about the franchisor, ranging from the initial investment cost to the franchisor’s obligations to franchisees and the company’s financial statements. In total, 23 disclosure items are covered.
“A franchise has to pass some litmus tests,” Schmellick said. “We’re not only going to look through the Franchise Disclosure Document and see what they say. We also will look at their financial statements and their officers and directors. What is their background in the industry? How many years have they been in this industry?