Franchise Disclosure Document: Everything You Need to Know
A franchise disclosure document (FDD) is a legal document that is provided to the franchisee regarding disclosure information.5 min read
Franchise Disclosure Document: What is it?
A franchise disclosure document (FDD) is a legal document that is provided to the franchisee regarding disclosure information surrounding the operation of a franchise. The franchisee is one who intends on purchasing a franchise. Franchising is a method of expanding a company and distributing goods or services through a license. For example, many restaurant chains are franchises, i.e., Burger King. This means that someone can purchase a license to open a Burger King franchise.
The Basics of an FDD
Franchises that operate in the United States are partially regulated by the Federal Trade Commission (FTC). The FTC provides that certain criteria must be met to ensure that franchises are providing prospective franchisees (potential buyers) with any and all necessary information required for the person to make a well-informed decision as to whether or not to become a franchisee in the company.
The FDD must be provided to the prospective franchisee no more than 14 days prior to signing the franchise agreement. The 14-day period begins with signing a receipt. The receipt, however, does not establish an obligation on the prospective franchisee’s part. It merely provides that the FDD was provided to the potential buyer. The disclosure document itself should provide answers to any questions the prospective franchisee may have. Should the prospective franchisee have any questions, he or she should consult with a lawyer experienced in this area who can review the document. Keep in mind that, at times, there is room for negotiation in the FDD as the document itself can serve as a starting point in the negotiating process of the Franchise Agreement.
What Information is Included in the FDD?
- Business experience. Here, information will be provided regarding the franchisor and the type of business.
- Litigation. This will indicate any prior or current civil and criminal suits involving the franchisor.
- Bankruptcy. This section, similar to the litigation section, will provide any and all information relating to current/prior bankruptcy filings involving the franchisor.
- Initial fees. Any initial fees will be mentioned here, as well as any additional fees that may be required, and what those fees apply to. However, there is an additional section, ‘Other Fees’, referenced below, that will set forth additional fees as well. Be sure to read both of these sections for a full understanding of all fees associated with the purchasing of a franchise.
- Other fees. A description of all other fees will be explained here, including any periodic fees that may be required on a monthly or annual basis.
- Initial investment. This section set forth in a table or chart, and will include all expenses required in order to launch the franchise.
- Restriction on sources of products and services. This section speaks for itself. It will contain any and all restrictions regarding the machinery (or sources) that can be used in making the products that will then be sold.
- Franchisee's obligations. This section is also straightforward. It simply entails the obligations the prospective franchisee will have when operating the franchise.
- Financing. If any financing arrangements were made between the franchisor and prospective franchisee, this section will state just that, setting forth the terms of that separate agreement.
- Franchisor's assistance, advertising, computer systems, and training. Any assistance that the franchisor offers to the franchisee will be mentioned here. This includes help with advertising, getting the computers up and running, and training of employees. Generally, a franchisor is well aware of the fact that a franchisee will need such assistance when launching his or her own franchise. So, for example, the new franchisee of a Burger King on the corner of Main Street will need help advertising the new fast food restaurant in that specific location. The new franchisee will also need assistance in hiring new employees, having those employees trained, and having several computers installed and set up to take customers orders.
- Territory. This section will provide the territory in which the franchisee is to be located, and if that brick-and-mortar store will be modified in any way.
- Trademarks. This section identifies the franchisor’s specific trademark as well as any other trade names in which the franchisor goes by.
- Patents, copyrights and proprietary information. Here, you will learn of any patents or copyrights that the franchisor holds, inclusive of pending patents.
- Obligation to participate in the actual operation of the franchise business. This section explains that the franchisee has an obligation to assist in the daily operation of the franchise.
- Restrictions on what the franchisee may sell. Here, you will be given restrictions on the type of product/services you can sell to customers. For example, if you wish to purchase a Burger King franchise, this section will state that you cannot sell an item on the menu that is not typically on a Burger King menu.
- Renewal, termination, transfer, and dispute resolution. Here, you will learn about renewing, terminating, and transferring your franchise. Specifically, you will learn whether or not your franchise can be renewed or terminated. If so, you’ll know the process by which you can renew, terminate, or even transfer your franchisee, if permitted. This section will also specify your rights and responsibilities in the event that you have a dispute with the franchisor, and may even indicate the jurisdiction where the dispute resolution will take place.
- Public figures. Should the franchisor choose to use public figures in its ad campaigns, the amount of compensation paid to them will be provided here.
- Financial Performance Representations. This section, while not required, will provide information on each unit’s financial performance, i.e., a specific menu item vs. a less popular menu item.
- Outlets and Franchisee Information. This section will provide information on all other existing franchises, as well as location and contact information.
- Financial statements. The franchisor’s audited financial statements from the past three years will be provided here.
- Contracts. This section will indicate all of the agreements that the franchisee will be required to sign before being able to launch the franchise.
- Receipts. All prospective franchisees will be required to sign a receipt immediately after receiving the FDD, which begins the 14-day clock for next steps, including the signing of the franchise agreement.
Let us Help
There are many requirements and steps to take when going over an FDD. If you want to learn more about your rights and responsibilities when it comes to the FDD, or launching a franchise, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.