What do I need to know about a Pizza Franchise Disclosure Document?

Every franchisor is required by the federal trade commission (FTC) to present you with a franchise disclosure document (FDD) prior to you buying a franchise.  The FTC has been regulating the sale of franchises for decades and the most recent rules put into effect came about in 2008.  For more information about franchising from the FTC take a look at their consumer guide to buying a franchise (link:  http://business.ftc.gov/documents/inv05-buying-franchise-consumer-guide).

The required format for the FDD includes 23 specific items of information.  As you begin researching pizza franchises there are several financial items you should focus your attention on early in your research:

Item-5.  Item-5 will detail the initial franchisee fee for opening a new outlet with the franchise.  If the franchisor offers any multi-unit programs they will be disclosed here.

Item-6.   Item-6 details additional fees such as royalties, advertising fund contributions, technology fees, and other miscellaneous fees.  Most franchises have a long list of miscellaneous fees for things like late royalty payments and required minimum local advertising spend.

Item-7.  Item-7 is a table that breaks down the estimated investment of the franchise with both low-end and high-end estimates.  The investment is broken into main sections such as equipment, opening inventory, initial franchise fee, training costs, etc.

Item-19.  Item-19 is where franchisors can choose to release an earnings claim (also called a financial performance representation) or choose to not disclose financial results of their stores.  Many franchisors will not disclose financial results and simply have prospective franchisees interview existing owners to learn first hand about the actual performance of the brand.

There are many other items within the FDD that will also require your attention, but for your first review of the disclosure start with these four points to figure out the economics of the pizza franchise.  




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