The franchise agreement and the franchise disclosure document (FDD) are frequent sources of confusion for many first-time franchisors and prospective franchisees. Each of these documents plays a critical role in the franchising process, and it is important to understand their terms and purposes.
Consulting with an experienced franchise and business law attorney is the best way to understand everything you need to know about these important documents. But learning about them first on your own is helpful, too.
Purpose of the Franchise Disclosure Document
The FDD, or franchise disclosure document, contains comprehensive details about your company. In fact, this document should contain all the information that would be of interest to a potential franchisee.
The Federal Trade Commission (FTC) requires every franchisor to disclose 23 specific items in the FDD. This lengthy document (most are hundreds of pages long) offers franchisees a clear picture of the company.
Presented to interested franchisees, the purpose of the FDD is to allow a thorough review of the risks and benefits of investing in a particular company. The FDD is not a contract, however, and it does not create a business relationship between a franchisor and a franchisee.
Purpose of the Franchise Agreement
Unlike the FDD, the franchise agreement is a legally binding document. Once signed by both the franchisor and franchisee, a business relationship is officially created.
This document, a sample version of which is included in the FDD, sets forth the franchisor’s requirements from a franchisee while operating the franchise business. While the details in the FDD may change from year to year and as the company grows, the franchise agreement typically remains unchanged. This ensures that all franchisees are treated fairly and impartially.
The Importance of Franchise Attorney Advice
Think of your FDD as a prospectus or pre-sale disclosure document for your franchise system. The document must comply with the law and meet FTC disclosure requirements, and it must be written clearly and concisely.
When written by a professional franchise attorney, a well-composed FDD is easily understood by potential franchisees. It may even help serve as a sales tool. In addition, the specific information in your FDD can help minimize the risk of future legal claims against your company.
An experienced attorney can draft the document with the appropriate language and information that protects you from future litigation.
Like the FDD, the franchise agreement should also be drafted by a knowledgeable attorney. This is a legal contract between you and your franchisee(s), and it outlines the legal obligations of both parties. As such, the document needs an expert eye to protect the future of your franchise system.
The attorneys and legal team at the Franchise & Business Law Group can help with all your franchisor legal paperwork. For assistance with your FDD and franchise agreement, contact our Salt Lake City, Utah, office today to schedule a consultation.