Learn about the FDD, the franchise disclosure document that all franchisors are required to present you before you can buy a franchise.Sign Up to Watch
[THEME MUSIC] amazing.com for franchise model, how to start a business
-Moving on to lightning round item number six, here we go. Other fees-- this is a disclosure of other recurring or isolated fees or payments. But the franchise-- the franchisee must pay to the franchisor or its affiliates. They must be disclosed here.
TERRY POWELL: Correct.
-Walk me through how this is different from item number five, this other fees section.
-Great question. This is the ongoing things that will reoccur, such as your royalty payment. All franchises have a royalty payment that's based typically on your revenues. It'll describe that, whether it's a percentage or whether it's a fixed monthly fee, if there's an advertising or a brand-building initiative associated with it, which is pretty common.
CLAY CLARK: Yeah.
-It'll describe what you can expect from that on a regular ongoing basis.
-Now, on behalf of the potential franchisees or current franchisees who are not here right now, I'm going to ask the tough question right here, because I've spoken at franchise events before where I've heard some of the conversations of the people who've bought said franchises. And they're kind of the rumors, the discussions, the things that they're asking. And sometimes, they'll say, why do we have to pay ongoing fees when we already paid $50,000 or $100,000 to buy the franchise? So can you go ahead and just clarify real quick here why there is a need for ongoing royalties after someone's already paid these initial fees?
-Great question and that comes up frequently. And what you want to understand about the relationship, this interdependent relationship, is that franchisors charge an upfront fee just to recover what they've already invested in expenses that they have to incur, such as this FTD document, registrations, attorneys, all the-- the programs that are going to be brought to your attention and value right out of the gate, before you're actually generating any revenue. So there's no royalty payments. There's no royalty dollars coming in.
So that really, that franchise fee is just designed to bridge that gap to get-- to get the focus on getting you ramped up and successful so that royalties will come in the future. Franchise companies only succeed from ongoing royalties. They don't succeed from awarding franchises and collecting fees upfront.
-I just feel like if you're watching this and you may be having that thinking where you're saying, oh my gosh, this is just an unreasonable franchise fee. I think when you realize the legal costs that go into making this federally regulated document, you'll get a little nauseated and then you'll start to empathize more so with those fees. So it's important for you to have it.
-Oh, I mean, it's expensive stuff. So we're moving on to lightning round item number seven. Here we go. This one's dedicated-- we're going to dedicate this one to John Elway. So here we go. This is the estimated initial investment. This item includes a comprehensive list of all the expenses that you can reasonably expect to incur as you open the business. Talk to me about this.
-Yeah, well, it gives you a range and it's-- it's addressed from a low to high range. And there'll be some variables but it will give you a description of what that low to high range will be. So the good news there is, when you estimate what you're going to need to get the business launched and the total investment, you're going to know the high side of that and the low side of that. And typically, it's going to fall somewhere in the middle.
-And again, if someone's reading this and learn how to start a business, before you get sticker shock and you kind of pass out here, one thing I'll tell you is that it's a federally regulated document. So the fees have to be-- I mean, they have to get the high range in there and then the low range. So you've got to calm down a little bit and you've got to-- when you read this, you've got to realize this is all factual stuff that we have to share. Otherwise, if it's not shared, that's-- that's against the law. So it has to be in there. So yeah, you got to get the high range and the low range in there.
-And the reason for the high and low variables-- people ask, well, why is there a range? Well, because of certain factors where you might live in relating to travelling to the training. Those costs will vary. If you have a location and there's rent involved or leasehold improvements involved, those expenses will vary in different parts of the country.
-Item number eight-- lightning round item number eight, in Spanish, the "ocho." So here we go. The restrictions on sources and product services. This page really gets specific about three things as it relates to procuring the products and services needed to make a business run successfully.
So first, which products or services the franchisee is required to purchase from the franchisor, two, which products or services the franchisee is required to purchase from approved third-party suppliers, and third, which products or services the franchisee is free to purchase wherever they like. So Terry, what's the benefit to the potential franchise owner of knowing all this kinds of goodness? I mean, what's-- what's the benefit here?
-Well, we talked about the transparency is the key so you understand. Your eyes are wide open. But more importantly, a franchise is really a recipe that we're licensing you the right to use. So in any recipe, the ingredients and where they're obtained and the quality and caliber and the managing of those ingredients have a direct impact in the result of that recipe. So for the franchisee, it's important to understand that the franchisor knows and has documented the best way to secure those types of supplies. And they control some themselves and then, they allow you to go outside.
-Let me give you an example of what not to do. In my office, we-- we're going to call it "Stickergate."
We hat to get some stickers. And so we said, we're going to get some stickers. And I-- and we ordered the stickers. Stickers come in from a weird supplier. They look terrible, you know? Colors are off, things are bad, so then we say, we'll get some-- we'll go with a different supplier. So we get some more stickers and then they're bad and then another.
And so it's, like, the third time now. And I'm going, let us document and let's-- let's carve that into a stone tablet. And henceforth, we will always our stickers from this-- because it's, like, you realize how much time you wasted by ordering stickers from the wrong place three times. And in franchising, it's documented sometimes. You say, you have to buy your banners, signs, auto-wraps from this person.
-And the franchise owner might be saying, well, why? I know a dude. He can do it cheaper. Well, but you might get it wrong three times first. And so it's all about-- because the franchisor makes their money off the royalties. So the faster you're successful, the more money everyone makes. So I love-- I love that relationship.
-It's important because those key elements make up the success factors of the business and help on how to start a business. And lots of times, there are savings associated with how the franchisor has negotiated those vendors and those suppliers for you and they want to make sure those savings are passed through so that the franchisee can be more profitable.
-Now here's a little fun factoid for the folks at home. In franchising it's very common for a franchiser to require a franchisee to buy certain items from certain suppliers. And this is often called restricted.
Terry, what does this term "restricted" really mean in layman's terms for the average person watching this?
-Well, these are the areas that the franchisor feels most passionate about, that they have to restrict the franchisee to maintain a certain aspect of purchasing. And lots of times they'll control that or require you to purchase it from the franchisor or their approved vendor. But restricted means you're not going have any variables there. Those are the most important part.
We're restricting any use outside of these guidelines. And they want to make sure franchisees understand that before they come onboard. So if there's any questions as to why and what the benefits are, they get a chance to talk about them.
-I know of a lady I met at a conference years ago, who owns a franchise. And she was printing her own business cards, because she knows a guy. And they looked awful.
And she was so upset how corporate was telling her she couldn't order cards from the dude that she knows. Like, why do I have to order from this supplier?
And I mean, I didn't want to say anything. I wasn't being asked for feedback. And I just said, oh, I think it's because they want to have a certain standard. I just kind of like-- what's that supposed to mean?
But her cards, there was a huge difference in quality. The franchise wants to protect that brand.
-Now in the world of franchising, franchisors often designate these approved suppliers for the franchise team. There's like approved suppliers. Now a lot of the conspiracy theorists watching this might be going, well, yeah. Because there's some kickbacks going on.
But these could include like auto wrap companies, suppliers of food products. Why should prospective franchise owners care about this kind of information? I was reading the FDD. And I'm thinking about buying a franchise. Why do I need to think about and know about this kind of information.
-Let's talk about the conspiracy theory, because that's what's in most people's mind. The fact of the matter is that if the franchisor requires you to purchase something, or they restrict it and require you to purchase it somewhere else, and they're making any type of a profit, or associated with any kind of refunds or rebates or kickbacks, that must be disclosed in the FDD. So there's no way that can happen.
-No way that can happen. So if you're pretty sure that a black helicopter is currently following you around, that may be true. But this is not true. There might be a drone in your house right now, but that's not true. So OK.
So Terry, here comes another fun factoid. In the world of franchising, many franchise owners allow unrestricted purchases for common purchases like pens, paper, staples, that kind of thing. Why does this matter for potential franchise owners to know what's unrestricted?
-Well, just again. It's a transparency. I can go out this to Staples or Office Depot and acquire things. Lots of times a franchisor will have a national account that says you can take benefits from that. But you're not required to. So you can really purchase those anywhere you want.
There are things that aren't going to be mission critical to the outcome of the recipe. If the person is writing using a pen or pads or supplies within that business that don't have a direct correlation to the success, then you'd have the variables.
-If you're thinking about buying a franchise, the one thing I'm just going to keep hammering through this as we get through this is that you literally have the most transparent opportunity to learn about a business because of this FDD then you would have in any other kind of business purchase. And I absolutely love this document because of that, even though it's laborious and it's expensive to make it.
When you're going to sell your business, if you want to sell it, this FDD helps build the value of the brand. So this is powerful stuff here.
Now we're moving on to lightning round item number nine. I know the folks at home are excited about this one. So here we go. It's franchisees' obligations. This is a disclosure of all the principal obligations of the franchisee under the franchise and other agreements after the franchise agreement has been signed. What is this item number nine about in a layman's terms perspective here?
-Well, think if it from a relationship standpoint. It's an interdependent relationship. As a franchisor, we come to that part of the relationship. And the franchisee has their part of the relationship. This section outlines what those commitments are from the franchisee standpoint.
So it sets out those. And if we had that in most relationships in life ahead of time, and we had an understanding of what each other's role would, it would be a much happier place to live.
-Oh, man. This should be like my new Terry Powell's relationship tips. Next time I meet with kind of like a man friend, I'm going to have to be like, well, here's moving forward, here are my obligations. Here are yours.
OK. So we've moving on here to lightning round item number 10. In Spanish, that's El Ten. So here we go.
Financing. A description of any financing terms the franchisor may make available to the franchisee, if any. Talk to me about this.
-I refer to as direct funding, direct financing. Some franchisors participate, or have programs available that they're involved in, or they may even finance part of the investment for you. If that's going to be the case, it needs to be disclosed there.
-Is this very common for a franchisor to offer financing for a franchisee?
-It's not very common.
-It's not typically the franchisor's wheelhouse or expertise area. If they were going to fund that or finance it, they'd likely open company units. So there's a lot of financing available. But if there's anything that the franchisor is going to provide, they must disclose it.
- Item number 11. Lightning round, item number 11. Here we go. Franchisors assistants, advertising, computer systems, and training. This is a list of the systems the franchisor really brings to the table to help the franchisors become successful. Terry, can you talk to me a little bit with some clarity about what kind of items I can find in item number 11?
- It'll be everything that the franchisor brings to you. We talked earlier about the franchise fee. People wonder, why am I paying this franchise free? This is a great area to understand what that franchisor brings to the table right out of the gate before you've generated $1. And it allows you to understand what they bring to the table. It talks about all the aspects of the system, the training, all the elements they're going to bring as far as support, ongoing support. All those are documented in there.
-If you buy a business or your start your own business, one of things that we try to do at Thrive is to provide a kind of an owner's manual where you can go on the website and find the answers you need, but will tell you, as a general rule, when you're self-employed, your kind of on your own. And in the world of franchising, you're really not on your own. You're self-employed, but you're not on your own. You're actually getting support from the franchisor. This part is super important for you to know what level of support you're getting, right?
- This is all the details. And from all levels that you're going to be supported, which in a franchise, is going to be soup to nuts. Everything is going to have a support element to it. It's going to have the ability to go online and get your questions answered. It's going to have operations manuals, procedures. All those elements are going to be important. So what of you can expect for the franchisor is outlined.
-And not that like certain parts this document aren't important, but this is a part you really would want to make sure you understand, because this is a big thing after the purchase. What kind of support we getting here. Moving on to item number 12, lighting round item number 12. This is the territory. By definition, the minimum area granted to the franchisee. Franchisor may use an area encompassed with a specific radius, a distance sufficient to encompass a specified population, or another specific designation. Terry, why is it so critically important for people to understand the territory that they're getting.
-This is very crucial. Most people come in with the expectation that they want some sort of exclusivity. They like the franchisor to put this fence around this area and protect them so no other franchise could come into that arena. Now, when you have exclusivity, you also have a downside. It means if a customer is outside that fence, you can't service them. So different companies and different franchise concepts have different territory restrictions. Or they'll provide the territory in writing, so you can depend on that.
-I read one FDD and, again, I love FDDs. It's just something I do. Pleasure reading almost. I was reading an FDD of one business that had no restrictions at all. You could just open up as many as you wanted nearby. And their whole theory was with their kind of service, they provided a service that everyone needs, and so their theory was we will sell one right across the street, almost. I guess it's up to them not to do it. I was reading that, I'm thinking there's no restrictions. And some are based on population and there's all different. So to make sure you have a mastery of that you understand that.
Lightning round item number 13. I know people are excited about this one, we are over halfway there. Here we go trademarks. All registered trademarks of the franchisor are specified here. Including, all be the registration information of those trademarks. Walk me through why it's important for me to know about these trademarks.
-And this information needs to be kept up to date, because trademarks are really the foundation of a franchise. It's a replicable, duplicatable system, but you're identifying yourself as that trademark in most cases. So you need to know that that trademark is registered and protected, so that three years from now, you're not going to get a notice that says, oops we didn't register that trademark. Now, you need to change the name of the business. That would not be a good thing.
-And stranger things have happened. So that's why, again, franchising is awesome. Because you know that your trademarks, your name that you're using, isn't going to need to change sometime.
-And associated trademarks that are subsets of that. Franchise companies have multiple trademarks, because within your franchise business, it may be called McDonald's, but there will be other names that you use within that that other companies can't because those are also registered.
Send us your email address, and our team of elite minds will get right on it.