The Franchise Disclosure Document: How To Understand It Before You Buy

Find out what the Franchise Disclosure Document is and why it’s important to understand.You’ve narrowed down your search to one franchise brand. You’ve worked out your financial investment.  You’re ready to investigate and finalize your decision.

But before your franchise opens its doors, you have to understand the complexities of the relationship you’re building with your franchisor. To help you determine if you’re making the best decision for your future, you have to understand the Franchise Disclosure Document.

Find out what the Franchise Disclosure Document is and why it’s important. When you have a solid understand of the document, you’ll be ready to start your business.

What’s Is A Franchise Disclosure Document?

The Franchise Disclosure Document (FDD) is your guide to franchise ownership. It’s a legal document outlining the details of the business relationship you’re about to form with your franchisor. The Federal Trade Commission (FTC) requires your franchisor provide you with the FDD at least two weeks prior to your investment in the brand.

The goal of the FDD is to give you an honest view of your franchisor and the opportunity you’re about to invest in. To make a wise franchise investment decision, you need all the facts.

Even after your franchise location is open, you’ll still find important guidelines for the relationship between you and your franchisor and how responsibilities are divided between the two parties. This is the most important information you’ll receive during your franchise search. The FDD gives you the ability to do your due diligence before making a long-term commitment to a brand.

What Does The FDD Cover?

One of the most challenging parts of starting the franchise process is sorting through the information in the FDD and using it to ensure you’re making a wise investment. There’s a lot of material in an FDD, and it's up to you to parse through it. Your contact at the franchise you are investigating should guide you through the document. In addition, many prospective franchisees turn to lawyers familiar with franchising and FDDs to help them understand this crucial document.

The FTC has mandated that the disclosure document must cover these 23 items:

 

  1. The Franchisor and any Parents, Predecessors, and Affiliates: The history of your franchisor and other companies they’re affiliated with

  2. Business Experience: Professional information about members of the company leadership

  3. Litigation: Information on any current litigation the franchisor is facing or has faced in the past

  4. Bankruptcy: Information on any current or past bankruptcy filings by the franchisor

  5. Initial Fees: The initial franchise fees and how they’re determined

  6. Other Fees: Any recurring fees associated with running your franchise

  7. Estimated Initial Investment: The total estimated investment you must make to open your franchise, with the information presented in a table format

  8. Restrictions on Sources of Products and Services: Any restrictions the franchisor has placed on where you should obtain your products

  9. Franchisee's Obligations: An outline of the responsibilities that a franchise owner agrees to

  10. Financing: Terms and conditions of financing

  11. Franchisor's Assistance, Advertising, Computer Systems, and Training: An outline of the services and support the franchisor is required to provide to a franchisee

  12. Territory: Rules regarding exclusive territories for franchisees and how they are determined

  13. Trademarks: Regulations about trademark usage

  14. Patents, Copyrights, and Proprietary Information: Rules about how franchisees may use patents

  15. Obligation to Participate in the Actual Operation of the Franchise Business: An outline of a franchisee’s level of involvement in running the business

  16. Restrictions on What the Franchisee May Sell: Rules on what franchisees can offer clients

  17. Renewal, Termination, Transfer, and Dispute Resolution: Your rights on renewing, terminating and transferring your relationship with your franchisor, and how disputes should be resolved

  18. Public Figures: How public figures can be used in advertisement and how they are paid

  19. Financial Performance Representations: A non-mandatory section on franchise unit performance

  20. Outlets and Franchisee Information: Location and contact information for currently operating franchises

  21. Financial Statements: Financial information covering the past three years

  22. Contracts: A list of all the contracts a franchisee must sign

  23. Receipts: A receipt that the franchisee is required to sign, verifying that they have seen the FDD

 

These 23 items should give you a holistic view of the history of your franchisor and the state of their business. Comb through the FDD carefully to identify any potential red flag before you invest.

If everything in the FDD aligns with your goals as a franchise owner, you’re ready to take the next step and invest.

 

Find out more about taking the next steps toward being a franchise owner in a free consultation.

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