What is a Franchise Disclosure Document?

Are you a prospective franchisee on the cusp of purchasing a franchise?

If so, understanding the ins and outs of a franchise disclosure document (FDD) is essential to protect your business throughout the term of your franchise agreement.

The FDD gives a franchisee information about a franchisor’s corporate history, business background, litigation history, etc. In sum, it ensures that a franchisee is giving their informed consent to a franchisor’s business practices and prospective risks before entering into an agreement with them.

If you are about to purchase a franchise, you should absolutely consult with an expert franchise and business law attorney to ensure that you completely understand your franchisor’s FDD. However, here are some tips to help you through this process in the meantime.

What is a FDD?

A FDD is a document that outlines 23 disclosure items about a franchisor’s business. The Franchise Rule requires franchisors to issue this legal document to prospective franchisees so that they can wholly balance the risks and rewards of entering into a franchise agreement.

The 23 franchise disclosure items are as follows:

Item 1: Franchisor’s corporate history and business structure
Item 2: Franchisor’s management team’s business experience
Item 3: Franchisor’s litigation history
Item 4: Franchisor’s bankruptcy filings
Item 5: Franchisee fees required to open the franchise
Item 6: Franchisee additional fees throughout agreement term
Item 7: Estimated initial costs for the franchisee to open the business
Item 8: Limitations on where franchisees source products and services for the business
Item 9: Franchisee’s principal obligations
Item 10: Franchisor’s financing offers
Item 11: Training and assistance the franchisor will provide to the franchisee
Item 12: Franchisee’s territory details
Item 13: Franchise Trademarks
Item 14: How a franchisee can use the franchise’s patents, copyrights, and proprietary information
Item 15: Franchisee’s obligation to operate the business
Item 16: Franchisee’s sale restrictions
Item 17: Franchise renewal, termination, transfer, and dispute resolution terms
Item 18: Public figures’ involvement with franchise and compensation terms
Item 19: Franchisor’s financial performance representations
Item 20: Existing franchisee and outlet information
Item 21: Franchisor’s audited financial statements
Item 22: Franchisee’s mandatory agreements
Item 23: Receipt acknowledging that franchisee received FDD

Understanding these disclosure items is important because it gives a franchisee the tools to determine whether they would like to proceed with the franchise purchase.

How Does the FDD Work?

The Franchise Rule outlines how the FDD should be delegated. It provides that franchisors should issue their FDD to a franchisee 14 calendar days before the franchisee signs a franchise contract or makes a payment to the franchisor.

Therefore, if you are a prospective franchisee, do not sign any documents or make any form of payment to the franchisor until you have reviewed their FDD with an attorney.

If you need help reviewing a FDD or have questions about starting a franchise, contact us today for assistance!