Franchise FDD

Understanding the FDD & Franchisee's Obligations

What is a Franchise Disclosure Document (FDD)?

An FDD is a legal document required by the FTC that must be delivered to every prospective franchisee interested in buying a franchise in the United States as part of the due diligence process. When buying a franchise business, a franchise disclosure document (FDD) is important because it provides you with full disclosure regarding all aspects of the franchise opportunity and company history.

An FDD provides detailed information on how the franchisor and franchisee business relationship will work. The document outlines both parties' responsibilities and outlines the investment. It also provides the contact information of current Franchisees that you may contact to validate the model and opportunity.

Items in a Franchise Disclosure Document

1. The Franchisor and Any Parents, Predecessors, and Affiliates – Item 1 of the FDD provides prospective franchisees a general overview of the franchise opportunity. It requires franchisors to disclose background information about the franchisor’s business background, the type of business the franchisee will operate, and the business backgrounds of parents, affiliates, and predecessors.
2. Business Experience – The franchisor is required to disclose the names and positions of the individuals that make up the franchisor’s management team, in addition to their prior business experience.
3. Litigation – A franchisor is required to disclose both current and past “actions” or lawsuits that the franchisor or its parents, affiliates, predecessors, or individuals disclosed in Item 2 were subject to or involved in.
4. Bankruptcy – Item 4 requires a franchisor to disclose the bankruptcy history of the franchisor and its parents, affiliates, predecessors, or individuals disclosed in Item 2 for ten years prior to the FDD date.
5. Initial Fees – This item requires the franchisor to disclose the initial fee that the franchisee will pay, or make a commitment to pay, to open and operate the franchise.
6. Other Fees – Item 6 describes recurring ongoing fees, including the type of fee, amount, due date, royalty percentage, brand fund, local advertising requirements, technology fees, and any other remarks.
7. Estimated Initial Investment – This Item provides prospective franchisees with the type and amount of expenditures they will incur prior to opening the franchise unit, in addition to an estimate of the type and amount of expenditures they may incur during the initial operating period.
8. Restrictions of Sources of Products and Services – Item 8 of the FDD requires franchisors to disclose certain additional information about a franchisee’s obligations to purchase or lease certain goods or services from the franchisor and approved vendors.
9. Franchisee’s Obligation – The disclosure guidelines under Item 9 are codified under the FTC’s Amended Federal Franchise Rule, a rule that requires a franchisor to disclose a franchisee’s obligations in a three-column table regarding relevant agreements.
10. Financing – A franchisor is required to disclose whether the franchisor, the franchisor’s affiliates, or the agent offers financing arrangements to franchisees. If yes, the Item must include the terms and conditions of these arrangements.
11. Franchisor’s Assistance, Advertising, Computer Systems, and Training – Item 11 provides an overview of the franchisor’s obligations to the prospective franchisee, as outlined under the franchise agreement.
12. Territory – This item informs prospective franchisees of the important aspects of running a franchised business, the franchisor’s and franchisee’s associated territory and rights to the territory, and if applicable, the franchisor’s plans to operate a competing franchise system.
13. Trademarks – Franchisors are required to disclose information relating to the legal validity and registration of the franchise system’s trademarks.
14. Patents, Copyright and Proprietary Information – Item 14 requires franchisors to disclose information on copyrights, patents, and proprietary information that are material to the operation of the business and licensed to the franchisee under the franchise relationship.
15. Obligation to Participate in the Actual Operation of the Franchise Business – This Item provides potential franchisees with an expectation of the time they will need to devote to managing, operating, and supervising the franchised business.
16. Restrictions on What the Franchise May Sell – Item 16 requires disclosure of the restrictions on goods or services that a franchisee can sell in the franchised business.
17. Renewal, Termination, Transfer, and Dispute Resolution – Franchisors are required to disclose the business location and condense some contractual terms in the franchise agreement.
18. Public Figures – Franchisors must disclose any public figure endorsing, promoting, or recommending the franchise system.
19. Financial Performance Representations – Franchisors can, but are not required to, disclose financial performance representations (FRPs) like revenue, profit margin, etc. from franchisees with prospects.
20. Outlets and Franchisee Information – Item 20 requires franchisors to disclose statistical information on the franchised and company-owned outlets for the past three years.
21. Financial Statements – Franchisors are required to disclose financial statements that reflect their financial condition.
22. Contracts – According to the FTC, franchisors must provide a franchise disclosure document to candidates at least 14 calendar days before the prospective franchisee signs a binding agreement or makes a payment to the franchisor.
23. Receipts – Item 23 requires franchisors to obtain a signed receipt for the FDD to provide to each prospective franchisee. 

Contact Franchise Genesis

Franchise Genesis offers a wide range of services to help businesses grow through franchising, such as consulting services, franchise creation and management, franchisor support, and the franchisor's assistance with legal documents. 

You’ll work directly with experienced franchise lawyers who provide valuable legal advice. For help writing a franchise disclosure document, contact Franchise Genesis at 980-261-5999.