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Keys to Assessing a Franchise Business Plan

Are you thinking of owning a franchise? Reviewing a franchises business plan and analyzing their FDD is a big project but shouldn’t be taken lightly.

What is the FDD

The Franchise Disclosure Document (FDD) is a format for disclosing franchisor information to prospective franchisees. The purpose of the FDD is to protect the public by providing information about the franchise company. And before any franchise agreement is signed, it must be reviewed by the potential franchisee and must contain a list of 23 items.
A franchise plan should provide a company's vision, financial reports and a marketing plan. The main difference is that it must address in detail the economics of both the franchisor and the franchisees – and show how the parent and its affiliates will be able to make money together.

The Essentials

As with any business plan, it should include a company introduction, a management summary, a marketing approach, thorough financial predictions and the financial requirements. Although it's easy to think the only thing you’ll need to review is financial predictions. The other details included in the FDD are just as important and should not be taken lightly.
First, you should compare any information in the FDD to what is listed on the company website. If you notice any discrepancies, you should ask the franchisor why. While reading the FDD, make note of the business plan's description, how it relates to your lifestyle and ideals, as well as the size and competitive nature of the franchise. While doing this you should analyze and consider the challenges and risks involved.
Once you get to the names and descriptions of the management team, take a second to look up the names of the management team and review and verify their background and history.

Will the Marketing Approach Work?

You should ask yourself several questions once you reach the marketing section of the FDD.
  • How will they attract new customers?
  • Is the product or service attractive?
  • Is there a need for this product or service?
  • Are additional funds necessary for local advertising?
  • How do the plans relate to your territory?
  • What are the advertising plans for the future (time frames, budgets, and specific marketing tools)?

Analyzing the Financial Details

The financial section of the FDD should provide a franchisee with information about the investment necessary to be successful, as well as the expected return on that investment (financial predictions).
In this first section of the financials you should see detailed information on the current financials and predictions for upcoming years. You should read through these and be cautious of seemingly high predictions. This section will include:
  • Income statements
  • Cash-flow estimates
  • Balance sheets
  • Estimated income
The second section relates to your investment and should tally of all the costs involved in starting up a franchise, including the initial capital needed to cover early marketing expenses as well as the operating losses incurred during the start-up phase. The dissection of marketing expenses should be re-analyzed, and the total amount of capital needed from both parties should be clearly laid out. Any loans need to be included, including what the franchisee is expected to put on the line.
Be sure to analyze the financial section carefully and make sure these expectations coincide with your financial goals.
*Information above provided by

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