The Franchise Disclosure Document (FDD): Things You Need to Know

A franchise disclosure document (FDD) is a legal document that a franchisor should disclose before a franchisee while selling a franchise. It contains essential information that a franchisee should know about to make an investment. The FDD usually refers to as “Franchise Rule” as it contains all the rules and regulations of establishing a relationship between franchisor and franchisee.

The FDD is predominantly enforced by the Federal Trade Commission (FTC) at the federal level. It consists of 23 sections that provide potential buyers of franchises the necessary information they need to assess the risks and benefits of such an investment. It is provided 14 days before any binding documents are signed.

The 23 disclosure sections of FDD are as follow:

Section 1: The Franchisor and Any Parents, Predecessors, and Affiliates

The franchisor should include complete corporate information that includes: parent and affiliated companies of the franchise.

Section 2: Business Experience

This provides information about the franchisor’s management team.

Section 3: Litigation

This section provides certain types of litigation that involve existing and old franchisors, predecessors, management team members identified in section 2, and affiliated franchisors.

Section 4: Bankruptcy

It discloses whether or not the franchisors, predecessors, management team members identified in section 2, and affiliated franchisors previously filed for bankruptcy.

Section 5: Initial Fees

In this section, the franchisor has to disclose the cost of starting a franchise. The franchisor needs to tell about all upfront fees that a franchisee has to pay to the franchisor before opening the franchised business. The initial fee includes the initial franchise fee and the upfront pre-opening fee.

Section 6: Other fees

The ‘Other fee’ section discloses all the fees required to pay throughout the franchise agreement term. This includes training, marketing, technology, brand development funds, on-going royalties, and any other specific franchisor fee.

Section 7: Estimated Initial Investment

Here, the franchisor has to disclose the estimated cost for opening and establishing a franchised business. It should include everything from build-out cost to reserve capital for the first three operational months.

Section 8: Restrictions on Sources of Products and Services

In this section, the franchisor has to disclose what products and supplies the franchisee has to purchase from the franchisor or their designated supplies. The franchisor also has to disclose the rebate and revenue that the franchisor earned from selling source restricted products and supplies to the franchisee.

Section 9: Franchisee’s Obligations

This section discloses all the franchisee’s obligations under the franchise agreement. The obligations could be provided in the table format to give a brief summary of all legal obligations. The legal obligation includes site selection, opening to default provisions, and termination of the franchise agreement.

Section 10: Financing

Here, the franchisor discloses whether or not they offer franchisees financing.

Section 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training

The franchisor discloses the type of training and assistance they will provide to the franchisee, the softwares and the computer systems that the franchisee needs to purchase, and the advertisement requirements imposed on the franchisee.

Section 12: Territory

In this section, the franchisor has to disclose information about the territory, i.e. whether or not they provide a protected territory, where the franchisor reserves the operational right within the franchisees’ territory, and how the territory will be determined.

Section 13: Trademarks

The franchise system’s trademark information is disclosed in this section. The trademark information includes whether or not the franchise system is registered with the united states patent and trademark office, the registration status, and whether or not the franchisor has the trademark conflict or dispute notice.

Section 14: Patents, Copyrights, and Proprietary Information

The franchisor provides all the information about any patent, copyright, and proprietary information related to the franchise system.

Section 15: Obligation to Participate in the Actual Operation of the Franchise Business

This section discloses the obligations that the franchisee owners must-have in the day-to-day franchised business operations. It also includes whether or not they should work in the franchised business on a full-time basis.

Section 16: Restrictions on What the Franchisee May Sell

This section included the restriction for the franchisee as to how much control the franchisor has over them. The restriction covers what items the franchisee may or may not sell as a part of the franchised business.

Section 17: Renewal, Termination, Transfer, and Dispute Resolution

Here, the franchisor discloses the summary of legal rights and obligations related to the renewal, termination, and transfer of the franchised business. It also discloses how the legal disputes between franchisees and franchisors would be resolved.

Section 18: Public Figures

This section discloses if there is any public figure or any celebrity who has been hired to promote the franchise system.

Section 19: Financial Performance Representations

Here, the franchisor has to disclose whether or not it is making any Financial Performance Representations, and if it does, provide all the relevant details here.

Section 20: Outlets and Franchise Information

A summary of franchised and corporate outlets over the past three years is presented in this section. And the projection of future projects is also presented here.

Section 21: Financial Statements

Here, the franchisor provides copies of the Franchisor’s Financial Statements.

Section 22: Contracts

List the contracts that should be signed between the franchisee and the franchisor. This contract list includes; site selection agreement, development agreement, release agreement, and a sample of the franchisor’s standard agreement.

Section 23: Receipts

This section discloses the two copies of the receipt page. The receipt page must be signed to confirm the proper disclosure and delivery of FDD.

You must understand all the sections covered in FDD to know the benefits of franchising. A wise decision is to hire an experienced lawyer who reviews the FDD with you. He’ll explain everything that will be helpful for you to understand the agreement.

Although uniformity is the hallmark of franchising, there is always room for negotiating the agreement terms, and FDD serves as a beginning point of the negotiating terms.

The FDD is a legal contract between the franchisor and franchisee, so it should be signed after careful reading. Being a franchisee, you need to clear out all of your concerns with your franchisor before signing the papers.