What You Need to Know about FDDs
A Franchise Disclosure Document (FDD) outlines a franchisor’s entire written franchise program. The FDD provides information about the franchisor and franchise agreement, as well as a complete description of the initial investment costs.
Franchisors do not expressly state in a franchise agreement that it is their responsibility to make any franchisee successful. Instead, franchisors develop tools and systems for their franchisees to use to find success.
Breakdown of the FDD
All FDDs follow the same format, as mandated by the FTC. They all consist of 23 items; plus, any exhibits and appendixes the franchisor includes. Below is a brief description of each:
- Item 1: A general review of the company, including any predecessors or affiliates.
- Item 2: Background information on officers, directors, and key employees.
- Item 3: Litigation; a ten-year history.
- Item 4: Outlines bankruptcy the company or its officers have declared in the past.
- Item 5: Reviews the franchise fee and other initial fees.
- Item 6: Ongoing costs, such as royalties, advertising, renewal, and transfer fees.
- Item 7: Breakdown of the initial investment by type of expenditure.
- Item 8: Who are the approved suppliers, and who do franchisees purchase products from?
- Item 9: Your obligations to the business as a franchisee.
- Item 10: Financing sources.
- Item 11: The franchisor’s obligations under the franchise agreement.
- Item 12: Territory descriptions.
- Item 13: Registered trademarks the franchisor is granting the franchisee the right to operate their business under
- Item 14: Patents, copyrights, and proprietary information the franchisor owns and is granting access to.
- Item 15: Obligation to participate in the actual operation of the business; day-to-day management requirements.
- Item 16: Products and services a franchisee may sell.
- Item 17: How to renew or transfer the business
- Item 18: What, if any, public figures represent the brand.
- Item 19: Financial performance representations for the franchise system – some franchisors withhold this.
- Item 20: Total number of outlets and franchisees.
- Item 21: Audited financials representing the health of the franchisor.
- Item 22: Franchise agreement and other agreements.
- Item 23: Acknowledgement of FDD receipt.
What to do with the FDD
When it comes time, all candidates should review the FDD with a licensed legal professional. It is important to find an attorney who specializes in franchise law as they will understand all the ins and outs of franchising. In our experience, franchise candidates who hire attorneys outside the franchising industry receive pages of copious legal notes and high legal bills from attorney research. Ultimately, these candidates rarely get the expert advice they pay for.
Lastly, as you review the FDD, assume these are the terms you will be doing business under. If you choose the right franchisor, your relationship will be of a personal nature, not of a legal one.
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