What is a Franchise Disclosure Document



March 27, 2024

What is a Franchise Disclosure Document?

The Franchise Disclosure Document (FDD) is a legal document that franchisors in the United States are required to provide to potential franchisees, as mandated by the Federal Trade Commission (FTC).

The FDD is designed to give prospective franchisees a comprehensive overview of the franchise, allowing them to make an informed decision about their investment. It includes 23 specific items of information about the franchise, its officers, and other franchisees.

Key sections of the FDD cover the history of the franchise, business experience of its key executives, initial and ongoing costs, franchisee obligations, financing options, training and support programs, and earnings claims if the franchisor chooses to provide them.

It also includes details about any litigation involving the franchisor or its executives, bankruptcy filings, and the terms of the franchise agreement.

The FDD must be provided to the prospective franchisee at least 14 days before any agreement is signed or any payment is made, giving the candidate ample time to review the document, seek advice from legal and financial advisors, and make a well-informed decision.

Why do we use Franchise Disclosure Documents?

FDDs, or Franchise Disclosure Documents, are legal documents presented to prospective franchisees in the franchising process.

Here's why we use them:

  • Transparency: FDDs provide comprehensive information about the franchisor, the franchise system, and the agreement terms, ensuring transparency in the franchisor-franchisee relationship.
  • Informed Decision-Making: By detailing the business, legal, and financial aspects of a franchise, FDDs help potential franchisees make informed decisions about their investment.
  • Regulatory Compliance: In many jurisdictions, offering an FDD is a legal requirement for franchisors, aimed at protecting potential franchisees from misleading or fraudulent sales practices.
  • Standardization: FDDs standardize the information that franchisors must provide, making it easier for potential franchisees to compare different franchise opportunities.
  • Risk Assessment: They help prospective franchisees assess the risks and rewards of joining a franchise system by providing details on fees, initial investments, obligations, restrictions, and the franchisor’s financial performance.

What's included in a FDD?

A Franchise Disclosure Document (FDD) is structured into 23 specific sections known as "Items," each designed to provide potential franchisees with detailed information about the franchisor, the franchise system, and the franchise agreement.

Here's a brief overview of what's inside an FDD:

  1. The Franchisor and Any Parents, Predecessors, and Affiliates: Information about the franchisor's history and corporate structure.
  2. Business Experience: Background information on the key management team.
  3. Litigation: Any past or current litigation involving the franchisor or its executives.
  4. Bankruptcy: Bankruptcy history of the franchisor or its key management personnel.
  5. Initial Fees: Detailed breakdown of initial franchise fees.
  6. Other Fees: Ongoing fees, including royalties and advertising costs.
  7. Initial Investment: Estimated initial investment required from the franchisee.
  8. Restrictions on Sources of Products and Services: Restrictions on where franchisees can purchase goods or services necessary for operation.
  9. Franchisee’s Obligations: A list of the franchisee's contractual obligations under the franchise agreement.
  10. Financing: Any financing options offered by the franchisor.
  11. Franchisor’s Assistance, Advertising, Computer Systems, and Training: Description of the training and support the franchisor will provide.
  12. Territory: Rights to a territory and any territorial protection.
  13. Trademarks: Information on the franchisor's trademarks, patents, and copyrights.
  14. Patents, Copyrights, and Proprietary Information: Additional legal protections for the franchisor's intellectual property.
  15. Obligation to Participate in the Actual Operation of the Franchise Business: Operational requirements for the franchisee.
  16. Restrictions on What the Franchisee May Sell: Limitations on the products or services the franchisee may offer.
  17. Renewal, Termination, Transfer, and Dispute Resolution: Terms for renewing or terminating the franchise agreement, transfer rights, and how disputes are resolved.
  18. Public Figures: Involvement of public figures in the franchise.
  19. Financial Performance Representations: Any claims by the franchisor about financial performance and data to support those claims.
  20. Outlets and Franchisee Information: Number and status of existing outlets.
  21. Financial Statements: Audited financial statements of the franchisor.
  22. Contracts: Copies of the franchise agreement and other contracts the franchisee is required to sign.
  23. Receipts: Acknowledgment receipts of the FDD document.

Who writes FDDs?

A Franchise Disclosure Document (FDD) is typically written by legal professionals or a legal team specializing in franchise law, on behalf of the franchisor.

These experts compile and organize the necessary information in compliance with the Federal Trade Commission (FTC) guidelines and any relevant state laws governing franchising.

The process involves detailed collection and presentation of the franchisor's business, legal, and financial details to ensure accuracy, completeness, and compliance with legal requirements.

The goal is to create a document that transparently communicates all essential aspects of the franchise opportunity to potential franchisees, helping them make informed decisions.

Given the complexity and legal importance of the FDD, it's crucial for franchisors to work with attorneys who have specific expertise in franchising.