Sold my commercial cleaning company last year. I had looked at a few FDDs before that but never dug deep. After the sale, I spent about three months reviewing FDDs for a friend who was buying a home services franchise. What struck me was how much the Item 19 financials varied in quality. Some gave detailed unit-level data, others just gave a range with no context. I started keeping notes on what to look for. Curious if others have gone through this after an exit.
FDD Review
My experience looking at FDD documents after selling my service business
Item 19 is where most people get lost. I sold a landscaaping business in 2019 and looked at a couple of FDDs for my nephew. The ones with gross margin by location were rare. Most just showed top-line revenue.
What did you find most misleading in the FDDs you reviewed?
I haveen't sold a business but I've reviewed a lot of FDDs as a buyer. The thing that gets me is the churn rate disclosure. Some FDDs bury it in Item 20 and you have to calculate it yourself. Others don't even give enough data to do that. After selling, did you feel like you had more patience for the fine print?
Definitely more patience. When you've been thruogh a sale you know which numbers actually mattered to your buyer. I focused on recurring revenue percentage and customer concentration. Most FDDs barely touch customer concentration.
I sold a pest control business in 2021. The FDD review after that was eye-opening. The Item 19 claims often used a different definition of 'gross revenue' than what I used in my sale. Some included callbacks and warranty work, some didn't. Made comparisons hard.
Did any of the FDDs you looked at have audited financials? I've seen a few that only had reviewed statements and the difference in reliability was noticeable
Quietstone makes a good point. Audited vs reviewed matters. Also, watch for the 'as of' date on the FDD. Some are nearly a year old by the time you get them.
I've never sold but I'm in the process of buying a service franchise. This thread is helpful. The customer concentrationn issue is real. I asked a franchisor about it and they said 'we don't track that at the unit level.' That felt like a non-answer.
How many FDDs did you end up reviewing? And did you use any kind of checklist?
I loiked at about a dozen. No formal checklist, just a spreadsheet where I tracked Item 19 revenue per unit, royalty structure, and territory size. The territory size was another thing that varied a lot. Some FDDs defined territories by population, others by zip codes with no population data.
That zip code thing is a common issue. I've seen FDDs where the territory map was just a rough drawing. You have to wonder how they enforce it
One more thing: the litigation section in Item 3. After selling my business I became more sensitive to any past disputes with franchisees. A few FDDs had multiple suits that were settled but the details were vague. That told me more than the financials in some cases.
I've been focusing on the financial performance representation but I'll go back and read Item 3 more carefully. Thanks for the reminder.
The FDD is only part of the picture. The franchise agreement usually has more surprises. But that's a different thread.