A franchise Disclosure Document is a legal document that is the pre-sale document of the Federal Trade Commission that the franchisor must disclose to prospective franchisees before selling the franchise.
The franchise disclosure document must contain 23 disclosure sections requiring franchisors to disclose information about franchise fees, opportunities, the legal relationship between the franchisors and franchisee, and all other information that is important about the franchise offering.
In this article, we will learn about the significance of the Franchise Disclosure Document and other detail you need to know before selling the franchise.
How Is A Franchise Disclosure Document Structured?
Franchise Disclosure Document is required by Section 436 of Title 16, Code of Federal Regulations. Certain states also have different disclosure laws.
The document can be provided electronically or Via Paper. A prospective franchisee can demand the official Franchise Disclosure Document from the franchisor.
The main purpose of the FDD document is to learn about supplanting the old-timey sales practices of franchisors, which could determine the truth of prospective franchisees.
The document must be in plain English and must contain 23 disclosures in it.
While the content of each item varies with each franchisor, each Franchise Disclosure Document is required to contain the following items:
1. About The Company And Any Parent Company, Affiliates, Predecessors-
The section has all the details related to the company and its history, as well as affiliated companies and any other parent company that is working with them.
2. Business Experience
In this section, you can see the summary of the experience that franchise company management has. It will help you to analyze future opportunities and growth.
The most significant disclosure of the document. It contains all the lawsuits relative to the number of franchisees in the system; buyer beware. 90% of the business gets sued.
It is very common if any business has one or two sues. If the company has countless sues. Then, you need to figure out the reason behind it; you can also take the help of the attorney.
You need to check that any franchisees or the franchisor have been through bankruptcy. If yes so, first identify the reason behind it.
5. Initial Fee
The franchisor must have to disclose the initial franchise fee and any other fee in the document. This fee might include a site development fee or fees for reviewing a lease.
6. Other Fee
The franchisor must disclose any other occasional fee, including royalties and advertisement fees.
Most of the franchisors get creative with the fee for adults, pest control, and gift card services. Make sure you plug all the fees into your budget.
This disclosure contains a table of all estimated fees and costs that franchisees can expect to incur.
The initial investment typically varies on the location, but it will be given an estimated range. This disclosure also specifies whether the term third-party financing is allowed or not.
This disclosure contains a restriction on where you can obtain inventory or services. Some franchisors require that you purchase supplies from an approved distributor or the franchisor itself.
9. Franchise Obligations
This disclosure contains all the information related to legal obligations.
In this section, the franchisors must identify the term of offering financing, leases, extended payment, or other important financial terms.
11. Assistance, Advertising, Computer Systems, And Training
This section includes one of the most important terms. It contains assistance the franchisor agrees to provide, such as site selection and other assistance.
Moreover, it contains a training program, ongoing support, and advertisement.
There are some terms that recommend attention to related Training and Advertisement by Federal Government.
12. Training And Advertisement
- Traning- You need to pay attention to training commitments, including:
- Who is eligible for the training, and at what cost? It is compulsory to include the term of eligibility for the training program and their charges and who pays these charges.
- Specify the time of the training program.
- Is support staff available for troubleshooting?
2. Advertisement– Franchisees need to pay attention to this term of advertisement:
- Does a franchisee have any control over how advertisement money is spent?
- How much percentage of revenue is spent on advertisement? And what about local advertisements?
- Do the franchisees need consent to develop to spend money and buy their own advertisement?
A territory protects against oversaturation and competition that puts your investment at risk. It is important to know whether you are getting exclusive or protected territory? If not, then you need to rethink your decision.
This disclosure outlines your rights to use the franchisor’s brand name and trademarks.
15. Patent, Copyright, And Proprietary Information
This disclosure outlines your rights to use the franchisor’s intellectual property.
16. Limitation To Participate In the Actual Operation Of The Franchise Business
This disclosure describes any limitation of the franchisee to participate in the actual operation of the business personally.
Most of the franchise opportunities require a to work full-time in the business; you can’t do it part-time or any other thing with this franchise. And some of the franchise opportunities allowed to do part-time.
Restriction on what the franchisee may sell- There are some restrictions on what a franchisee may sell or not.
This disclosure item will outline you will sell only its offering; any other item will not allow selling.
17. Renewal, Termination, Transfer, And Dispute Resolution
This disclosure defines whether your franchise contract is renewable and the circumstances allowing early termination.
This section also contains conditions for selling your business if you want to sell the franchise.
18. Public Figure
Public figures play a vital role in running any business. This disclosure defines public figures involved in the franchise as investors or owners.
Does the franchisee use celebrities to promote the franchise? This should be disclosed.
19. Financial Performance Representation
As per International Federation Association, approximately 30% of franchisors include financial performance representation for franchisees.
The information provided by the franchisor includes the following:
- 49% give expense data
- A franchisee unit income statement
- Providing financial representation gives sales data.
20. Outlets And Franchisee Information
This disclosure is very important because it lists statistical information about the franchise locations over the past three years.
It also lists current franchisees and every former franchisee in the past year, along with their contact number and addresses.
21. Financial Statement
This disclosure contains a financial audit statement. It is the most important section as the point of view of future growth. Review the audited to make sure the franchisor is not in trouble.
This disclosure includes all the documents and contracts you will be asked to sign and must be attached to the franchise disclosure documents. It contains the franchise agreement, leases, etc.
You will be asked to sign a receipt so the franchisor has proof that they provided the franchising disclosure document.
But signing the receipts doesn’t bind you to buy a franchise. It is your right to ask for FDD.
Why Should You Hire An Attorney To Review FDD?
Some people make the mistake of not hiring an attorney because they think that the franchise disclosure document can’t be changed.
So, they think that hiring an attorney is a waste of time. But, the thing is, attorneys play a vital role in the review of FDD.
An experienced person can advise you on how to protect yourself. It is difficult to understand the legal term for businessman, but an attorney can easily understand and give us the best advice.
Owning a franchise is not like having ice cream; you have to take some major steps if you don’t want to take risks with your investment.
So, hiring an attorney is the best choice. A little bit fee of attorney can cut the risk of your millions of investments.
Frequently Asked Question
Why is a Franchise Disclosure Document important?
Franchise disclosure documents play a prospective role in the decision of the franchisee to buy a franchise.
It also provides information and opportunities to know more about the franchisor and clear up.
Is that signing the receipt of FDD binding the person to buy the franchise?
No, signing the receipt of FDD doesn’t bind a person to buy the franchise.
What is Disclosure 21 of the FDD?
Disclosure 21 include all the financial statement and audit of the franchisor.
Amit Gupta is the founder of DrFranchises. He has a keen interest in investments, and has thus far invested in a few franchises. Franchise businesses are his forte- he knows all there is to know about their space requirements, fees, ROI potential, and business models. This makes him an ideal candidate for anyone looking to invest in a franchise