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Darrell Johnson, CEO of franchise researcher FranData and a board member of the Int'l Franchise Association, reveals that a franchise disclosure document (FDD) is of very limited use for franchise unit investors, particularly when compared to much more robust information and standards provided to stock investors, such as company required quarterly reports from the Securities and Exchange Commission.
Over the years, the FDD has been seriously misused and misinterpreted regarding system performance. In my opinion, prospective franchisees, the media, lenders, and all sorts of experts have tried to infer some system performance attributes and investment potential from many sections, most notably Item 19 [BMM note: franchise unit earnings] and Item 20 [franchise unit churning]. From a potential investment standpoint, the information contained in an FDD simply tells a small portion of the story, particularly as it relates to system performance. Combined with the absence of the quarterly reports publicly traded companies are required to issue, an FDD's usefulness to the multi-unit operator's investment decision process is rather limited.
Unfortunately, other sources of information for the multi-unit investor aren't there either." [via Multi-Unit Franchisee ]
Johnson adds that important information and common metrics in comparing franchise brands are sadly non-existent. He argues that the FDD is better at showing the face of the franchisor rather than the franchise.
BMM says: Buyer beware. Even when seeking just the limited information on a franchising company that the Franchise Disclosure Document provides, a buyer cannot depend on the accuracy of what he reads there. No federal or state government monitors what is written in it. While covering franchise news, Blue MauMau regularly sees undesired and unflattering information about the franchisor — e.g. franchisee lawsuits, bankruptcy, officer felonies, etc. — conveniently left out of Franchise "Disclosure" Documents.
Ah, so what's a franchise unit investor to do in making an informed franchise decision when faced with such insufficient and unreliable information?