What is the Franchise Disclosure Document (FDD)?
When investigating franchising opportunities, either for the business owner seeking to expand, or for the entrepreneur looking for a business opportunity, one can expect to examine volumes of paperwork. One of the most important documents is the Franchise Disclosure Document (FDD). This is the revised title for what was previously referred to as the Uniform Franchise Offering Circular (UFOC).
The Federal Trade Commission (FTC) governs how franchising operates in the United States, and they issued specific guidelines in 1978, defining a franchise and issuing disclosure guidelines for the sale of franchises. Those FTC franchise requirements, which were significantly amended in 2007, are generally referred to as the “Franchise Rule.”
The new FTC disclosure document is called the Franchise Disclosure Document (FDD).
A “Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:
(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
https://franchiseguardian.com/franchising/7-undeniable-franchisee-advantages/(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a requirement payment or commits to make a required payment to the franchisor or its affiliate.”
The FDD is a Pre-Sale Disclosure Document
The Franchise Rule, reproduced above, requires that franchisors provide to prospective franchises the Franchise Disclosure Document at least 14 days prior to signing any franchise agreement. This allows a prospective franchisee to make an informed decision prior to entering into any franchise relationship. In essence, the FDD provides essential information that reveals potential risks and benefits, meaningful comparisons with other investments, and many other items that allow further investigation of the franchise opportunity.
The FDD Requires Clarity
The Franchise Rule requires that the FDD be written in “Plain English” and not in legalese designed to obfuscate or confuse readers. It is to provide a clear explanation of information about the franchisor and the franchise offering, including information about the franchisor’s business, the terms of the relationship and the rights and obligations of the license. Some states even require that franchisors file a copy of their FDD with the state to ensure its clarity.
The FDD Includes 23 Specific Items of Disclosure
The FTC-established Franchise Rule specifies 23 areas of disclosure (called Items) together with a written receipt. These 23 Items are:
- The Franchisor and any Parents, Predecessors, and Affiliates
- Business Experience
- Initial Fees
- Other Fees
- Estimated Initial Investment
- Restrictions on Sources of Products and Services
- Franchisee’s Obligations
- Franchisor’s Assistance, Advertising, Computer Systems, and Training
- Patents, Copyrights, and Proprietary Information
- Obligation to Participate in the Actual Operation of the Franchise Business
- Restrictions on What the Franchisee May Sell
- Renewal, Termination, Transfer, and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Outlets and Franchisee Information
- Financial Statements
The International Franchise Association provides an excellent document that explains each item in detail, as well as giving counsel on constructing an FDD for a franchise. You can download the PDF file here.
Franchise Guardian and Your FDD
When it’s time to develop a legal Franchise Disclosure Document, you will require the services of a franchise advisor and/or qualified franchise attorney. This vital document is the result of a significant strategic and business planning process. Franchise Guardian can help you construct the necessary FDD as part of our comprehensive franchising services.
For prospective franchisees, it is important that when reviewing an FDD, you understand what is included and not included. A Franchise Guardian advisor would be happy to review an FDD with you and answer any questions. Contact us to schedule a consultation today.