Reviewing a Franchise Disclosure Document: Item 2, Business Experience
It is important to know the business experience of someone whose business model you’re going to follow. That’s a no-brainer. If you are a potential franchisee, your franchisor has to provide you with the legally-mandated Franchise Disclosure Document that includes 23 sections – Item 2 of the FDD is called “Business Experience.”
Item 2 of the FDD is short, but it makes up in importance what it lacks in length. It says as follows:
Item 2: Business Experience. Disclose by name and position the franchisor’s directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered by this document. For each person listed in this section, state his or her principal positions and employers during the past five years, including each position’s starting date, ending date, and location.
This gives you what amounts to a resume for each of the owners or managers of the company. It seems fairly simple – the franchisor just needs to provide a list of names, dates, and positions. On its face, Item 2 of your FDD doesn’t provide a lot of information.
The research opportunities it provides, however, give a potential franchisee a goldmine of information. The two primary issues that I look for are (1) franchisors with a negative business history, and (2) franchisors with little or no experience.
Franchisors with a negative business history are the first type of franchisor to be aware of when researching your FDD Item 2 disclosure. With research databases like Dunn & Bradstreet, federal and state court records, secretary of state records, and even Google, you can find out what other businesses the franchisor has been involved in and how they fared. If the franchisor has been involved in a string of failed startups, you may want to take a second look. Or, if the businesses the franchisor started have a history of consumer complaints or legal and regulatory activity, you may want to look for another opportunity.
Franchisors with little or no business history are the second type of franchisor to look out for when researching your FDD Item 2 disclosure. An entrepreneur might have a great idea for a business and immediately try to franchise it. In my experience, these types of franchises should be avoided. The franchisor needs to run a store on his or her own and experience the business “on the ground” before you can be confident that they worked out the kinks. The best franchisors start slowly and bring in experienced businesspeople to make the transition from shopkeeper to franchisor.
Researching a potential franchisor and reviewing any of the other 23 items in a FDD are the things Fairview Law helps franchisees with every day. We are a Charlotte, North Carolina business law firm that represents entrepreneurs, business owners, and franchisees throughout North Carolina. Give us a call at 980-999-3557 to see how we can help your business.