Updated Franchise Disclosure Document
The franchisor’s disclosures may change between the time you receive the Franchise Disclosure Document (FDD) and the time you sign the franchise agreement. For example, the franchisor may have updated its FDD each calendar quarter and must update the FDD after its fiscal year ends.
You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated FDD may reveal new lawsuits were filed by or against the franchisor, changes in the franchisor’s management or training teams, more current financial performance data, or other useful information.
Additional Sources of Information
Accountants and Lawyers
In addition to reading the franchisor’s FDD—including any updates—and speaking with current and former franchisees, consider talking to an accountant and a lawyer. An accountant can help you understand the franchisor’s financial statements, develop a business plan, assess any earnings projections and the assumptions they’re based on, and help you pick a franchise system that is best suited to your investment resources and goals.
A lawyer can help you understand your obligations under the franchise contract. These contracts usually are long and complex. A problem that comes up after you have signed the contract may be very expensive to fix—if it can be fixed at all. Choose a lawyer who is experienced in franchise matters and rely on your lawyer or accountant for a recommendation about whether to buy a particular franchise.
Banks and Other Financial Institutions
If you need financing to buy a franchise, a bank lender may be able to provide you with a Dun & Bradstreet report or similar financial profile of the franchisor. The bank may also obtain sales and profit information from the franchisor, even if the franchisor won’t give you that information. But some franchisors give banks unrealistic, overstated profit projections so the bank will provide financing to expand the franchise system. Remember that bank approval of a franchise loan doesn’t necessarily mean the franchise is a safe or good investment.
Better Business Bureau
Check with the local Better Business Bureau (BBB) in the cities where the franchisor has its headquarters and the city where you’re thinking of buying a franchise. Ask whether there are complaints on file about the franchisor’s products, services, or personnel.
Government
Several states have registration or disclosure laws that regulate the sale of franchises. Some states have laws meant to protect franchisees after they buy. The FDD should include information about any such laws in your state. If the information isn’t in the FDD, check with your state Attorney General’s office, office of consumer affairs, or state securities division.
In Texas, franchisors are required to provide potential franchisees with a Franchise Disclosure Document (FDD) that contains detailed information about the franchise opportunity. The FDD must be updated at least annually, but franchisors may also update it quarterly or after significant changes occur. Before signing a franchise agreement, prospective franchisees have the right to request the most current FDD, which may include new information such as recent litigation, changes in management, and updated financial performance data. It is advisable for potential franchisees to consult with an attorney experienced in franchise law to understand the obligations of the franchise contract, which can be complex and difficult to alter once signed. Additionally, consulting with an accountant can be beneficial for analyzing the franchisor's financial statements and developing a business plan. While Texas does not have a specific franchise registration law, it is important to verify any relevant state laws that may affect the franchise relationship. Prospective franchisees should also conduct due diligence by checking with the Better Business Bureau, financial institutions, and state consumer protection agencies to gather more information about the franchisor's reputation and the viability of the franchise.
