The Franchise Disclosure Document (FDD)

Franchise Registration/Disclosure Matters

The Franchise Disclosure Document (FDD) is a legal document that provides detailed information about a franchise opportunity to potential franchisees. The document is required by the Federal Trade Commission (FTC) and must be provided to potential franchisees at least 14 days before they sign a franchise agreement or pay any fees, although some states have enacted more stringent requirements.

In 1978, the Federal Trade Commission (FTC) enacted the “Franchise Rule”. The Franchise Rule, as amended, requires a franchisors’ franchise disclosure document (the “FDD”) provide prospective purchasers with adequate disclosure to make an informed decision before entering into a franchise agreement. The FDD contains information about the franchisor, the franchise opportunity, the franchise system, the fees and expenses associated with owning and operating the franchise, specific terms and conditions related to the franchise agreement, and the obligations of both the franchisor and franchisee.

While the FTC does not require the franchisee to file or register the FDD with a federal agency, the FTC Rule does regulate franchise sales in all 50 states. The FDD is required to have a cover page, and address 23 required “Items” that address core information about the franchisor. These “Items” are as follows:

ITEMS 1-23 (An Overview)

Item 1. The Franchisor and any parents, predecessors, and affiliates: This section provides details about the franchisor’s business history and any related entities.

Item 2. Business experience: This section lists the business experience of the franchisor’s key executives and managers.

Item3. Litigation: This section discloses any past or pending litigation involving the franchisor, its officers, or its affiliates.

Item 4. Bankruptcy: This section discloses any past or pending bankruptcy filings by the franchisor, its officers, or its affiliates.

Item 5. Initial fees: This section provides information about the initial franchise fee and any other fees the franchisee must pay to the franchisor.

Item 6. Other fees: This section discloses any ongoing fees that the franchisee must pay to the franchisor, such as royalties or advertising fees.

Item 7. Initial investment: This section provides an estimate of the total amount the franchisee will need to invest to open and operate the franchise.

Item 8. Restrictions on sources of products and services: This section discloses any restrictions on where the franchisee can purchase products or services.

Item 9. Franchisee’s obligations: This section outlines the franchisee’s responsibilities, such as operating the franchise according to the franchisor’s system and standards.

Item 10. Financing: This section discloses whether the franchisor offers financing to franchisees.

Item 11. Franchisor’s assistance, advertising, computer systems, and training: This section provides information about the franchisor’s training and support programs.

Item 12. Territory: This section discloses whether the franchisee will have an exclusive territory and the size of that territory.

Item 13. Trademarks: This section discloses the franchisor’s trademarks and whether the franchisee will be authorized to use them.

Item 14. Patents, copyrights, and proprietary information: This section discloses any patents, copyrights, or proprietary information the franchisor owns or licenses.

Item 15. Obligation to participate in the actual operation of the franchise business: This section discloses whether the franchisee must participate in the day-to-day operation of the franchise.

Item 16. Restrictions on goods and services offered by franchisee: This section discloses any restrictions on the types of goods or services the franchisee may offer.

Item 17. Renewal, termination, transfer, and dispute resolution: This section outlines the terms of the franchise agreement, including how long the agreement lasts, how it can be renewed or terminated, and how disputes will be resolved.

Item 18. Public figures: This section discloses whether any public figures endorse the franchise.

Item 19. Financial performance representations: This section discloses any financial performance representations made by the franchisor.

Item 20. Outlets and franchisee information: This section provides a list of all current franchise outlets, as well as contact information for current and former franchisees.

Item 21. Financial statements: This section provides the franchisor’s audited financial statements for the past three years.

Item 22. Contracts: This section includes In list form, the franchise agreement and any other contracts the franchisee must sign.

Item 23. Receipt: This section provides a space for the franchisee to sign and acknowledge that they have received the FDD.

In conclusion, the Franchise Disclosure Document (FDD) provides a comprehensive overview of a franchise opportunity and is an essential tool for potential franchisees to evaluate before investing in a franchise. With 23 items covering topics such as the franchisor’s business experience, the initial and ongoing fees, the franchise system’s performance and history, and the rights and obligations of both the franchisor and franchisee, the FDD provides a complete picture of what it means to be part of a franchise system. It is important for potential franchisees to carefully review the FDD and seek the advice of legal and financial professionals before making a final decision. By doing so, they can ensure that they have all the information they need to make an informed decision and maximize their chances of success as a franchisee.

Exhibit “A” of the FDD- The Franchise Agreement

The franchise Agreement, is a legally binding contract between franchisor and franchisee that governs the relationship between the franchisor and franchisee and is essential for the successful operation of the franchise business. Several sections of the FDD cross reference corresponding sections of the franchise agreement to emphasize material aspects of the franchise agreement. These include, for example:

• Required fees – initial and ongoing
• Territory rights
• Trademark use
• Term and renewal rights
• Transfer rights and conditions
• Non-compete covenants

In summary, the franchise agreement is a vital component of the franchising process, as it establishes the framework for the business relationship between the franchisor and franchisee. The agreement outlines the rights, responsibilities, and obligations of both parties and helps ensure that the franchisor’s business system and intellectual property are used in a consistent and effective manner. By following the terms of the agreement, the franchisor and franchisee can work together to build a successful franchise business that benefits both parties.

Other related FDD documents include, for example:

• Specific business information
• General release
• Non-disclosure and non-compete agreements
• State addendums
• Operations Manual table of contents
• Financial statements
• Disclosure questionnaire