Once you decide to move forward with the purchase of a franchise, the franchisor will provide you with a Franchise Disclosure Document (FDD). The FDD should be given to you at least 14 days prior to signing the Franchise Agreement.
What is the FDD?
This is a complex document containing important information about the franchise opportunity and your obligations as a prospective franchisee. We have created a simple guide to help you understand the different items that the FDD includes.
Put simply, the FDD outlines important information regarding the roles and responsibilities of both parties. It provides an honest and comprehensive view of the brand. The FDD is a regulated document mandated by the Federal Trade Commission (FTC).
This guide will walk you through the 23 items of the FDD and give you a brief overview of each. We hope it helps you navigate the franchising process more easily and make a more informed decision about your future.
Item 1: The Franchisor and Any Parents, Predecessors, and Affiliates
The first item of the FDD provides an overview of the franchise brand, business model, and franchising model. This includes how long they have been in business, their parent or affiliate companies (if any), and potential competitors. It also outlines what products and services you will be authorized to provide as a franchisee.
Item 2: Business Experience
This section of the FDD will discuss information on the franchisor, the business experience of the CEO, President, COO, and CFO.
Item 3: Litigation
Any litigations against the franchisor or any affiliates (listed in item 2) should be disclosed here. These may include resolved or pending lawsuits between the franchisor and a franchisee or administrative action against the franchisor.
Item 4: Bankruptcy
This section reveals if the franchisor or any affiliates have filed for bankruptcy. If any of the franchisor’s executives have a history of bankruptcy, it must also be disclosed here.
Item 5: Initial Fees
This item details the initial franchise fees that will be due upon signing the franchise agreement. It may also include costs of initial inventory, signage, and necessary equipment or supplies. This section should provide a brief explanation of what each of these fees covers.
Item 6: Other Fees
Any other relevant fees will be included in this section, including royalty fees, brand development fund contributions, and local advertising. This includes fees paid to the franchisor and its affiliates.
Item 7: Estimated Initial Investment
Franchisees will be provided with an estimate of their initial investment. This should include the capital needed to open a franchise location and cover the first three months of operation. These expenses will usually be provided as a range due to the many variables that can affect the total cost. This section of the FDD breaks down the estimated initial investment into specific expenses.
Item 8: Restrictions on Sources of Products and Services
This section details the approved suppliers and permitted products for purchasing. This ensures all purchases meet the franchise’s standards. This section also discloses the amount of revenue the franchisor and its affiliates receive from franchisee product purchases.
Item 9: Franchisee’s Obligation
In this section, you will find an inclusive list of your obligations as a franchisee. This section will reference other items within the FDD and franchise agreement.
Item 10: Financing
If the franchisor offers any direct or indirect financing programs, they will be listed in this section.
Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
This section lists the obligations of the franchisor to you, the franchisee. This includes pre-opening assistance, initial training, site selection, advertising, and ongoing assistance after opening. It will also specify computer system requirements set forth by the franchisor.
Item 12: Territory
This section discloses areas where potential franchisees can build or purchase real estate and discusses territory protections provided by the franchisor. The franchisor should lay out any potential conflicts with other brands that may arise. It should also disclose any businesses operated by the franchisor that may offer similar products or services.
Item 13: Trademarks
Item 13 discusses the principal trademarks you will be using when operating your franchise and define authorized and unauthorized uses.
Item 14: Patents, Copyrights, and Proprietary Information
Any patents, copyrights, proprietary information, and intellectual property that you will be authorized to use as a franchisee.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
This portion of the FDD explains the level of involvement the franchisor requires you to have in the franchise location. It will indicate whether hiring a designated manager is permitted and the training requirements for such a designee.
Item 16: Restrictions on What the Franchisee May Sell
The franchisor may restrict what goods and services a franchisee is allowed to provide. The franchisor will likely prohibit the sale of goods or services outside of the scope of the business.
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
This item will describe the franchise agreement terms, renewal, termination, repurchasing, and transfer options. It will also establish how any disputes between franchisor and franchisee will be handled.
Item 18: Public Figures
Any public figures who are associated with the franchise or promote the products and services.
Item 19: Financial Performance Representations
In this section, the franchisor may choose to disclose any information on sales, earnings, or expenses. All financial claims must be backed by evidence or reasonable explanations in order to be included in the FDD.
Item 20: Outlets and Franchisee Information
The franchisor will provide a table to summarize franchise activity over the past three years. You’ll also be entitled to contact information for other business owners within the franchise system.
Item 21: Financial Statements
Audited financial statements will be provided in the FDD for the last three years of franchising, if applicable. It may be advisable to have an accountant review this section with you to help you understand it better.
Item 22: Contracts
This section lists the contracts required in order for a potential franchisee to move forward with the franchise process. This includes the franchise agreement, development agreement, and any contracts specific to the state.
Item 23: Receipts
This final section is where you will record the date you received the FDD and certify that you understand its contents. Once you have been approved to become a franchise partner, you will be able to move forward with your franchise purchase!
We are determined to make the franchising process seamless for our clients! If you have any questions or concerns, feel free to reach out to us. We will be happy to help!