Considering a franchise investment? Before you get swept up in logos, marketing kits, and location plans, there’s one document that deserves your full attention: the Franchise Disclosure Document (FDD).
It’s long, it’s legal, and yes, it’s crucial.
This document isn’t just paperwork — it’s your first real look under the hood of the business you’re about to partner with. Here’s a simplified breakdown of what the FDD covers and the red flags you should never ignore.
What is a Franchise Disclosure Document?
The FDD is a legal document that franchisors are required to provide to prospective franchisees. Think of it as your pre-contract due diligence bible — filled with 23 detailed sections (called “items”) that explain everything from fees and obligations to financial performance and legal history.
In the Philippines, while we don’t have the same regulatory framework as in the U.S., many franchisors follow similar practices, especially those with international ties. That makes understanding the FDD a must.
Key Sections to Pay Close Attention To
Let’s zoom in on the parts that matter most — and what they really mean.
Item 1-4: The Franchisor’s Background & Legal Standing
These sections give you the history of the company, their business model, and any legal issues. Watch for:
- Recent lawsuits or bankruptcy filings
- Frequent ownership changes
- Limited operating history
Red flag alert – A franchisor with unresolved legal issues or a shaky past may bring more risk than reward.
Item 5-7: Fees & Initial Investment
From franchise fees to royalty percentages and estimated startup costs — this is where your wallet gets real.
Ask yourself:
- Are the costs clearly broken down?
- Do the numbers align with what other franchisees are saying?
- Is there transparency in how these figures were calculated?
Tip – Cross-check with current franchisees to verify if the investment ranges are realistic.
Item 11 & 12: Franchisee Obligations & Territory
These sections cover your operational duties and your territory rights.
Look out for:
- Strict operational rules that leave no room for local flexibility
- Vague territory definitions (e.g., “we may open other locations nearby”)
Why it matters – You don’t want to invest in a franchise only to compete with another branch down the street.
Item 19: Financial Performance Representations (If Provided)
Not all franchisors include this — but when they do, read it twice. This item shows income claims or financial performance data from existing units.
Things to check:
- Are the figures averages, medians, or high performers only?
- Are expenses included, or is it just gross sales?
- How many franchisees are represented in the data?
Caution – If there’s no Item 19, ask the franchisor why. A lack of transparency could be a red flag.
Item 20 & 21: Franchisee List & Financial Statements
Here’s where you can spot patterns. Contact existing and former franchisees — ask about their experience, support quality, and profitability.
Also, examine the franchisor’s audited financial statements to assess their financial health.
Pro tip – If the franchisor avoids connecting you with franchisees or offers cherry-picked contacts only, that’s a sign to dig deeper.
Final Thoughts
The FDD isn’t meant to intimidate you — it’s meant to inform you. And if something feels off, it’s okay to slow down and seek legal advice. Investing in a franchise is a big decision, and the FDD is one of the most important tools to help you make it wisely.
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