What is it? Why is it important?
The Franchise Disclosure Document, or, FDD, is one of the most critical franchise documents to assist you with your franchise decision. The FDD is a legal document, updated annually by the franchisor. It’s required to be presented to a prospective franchisee in the pre-sale disclosure process.
The Federal Trade Commission (FTC) rule of 1979,or, The Franchise Rule, outlines compliance obligations of how the FDD is presented. It also explains who it’s presented to, and who furnishes to the prospect. A franchisee must receive the franchisors FDD at least 14 days before they are asked to sign any contract or pay any amount of money to the franchisor. The franchisor can furnish the FDD to the prospect through various methods like paper, email, or webpage.
Each FDD has 23 items. It is important for anyone considering a franchise opportunity to review each item carefully, and to have an experienced franchise attorney review the FDD as well.
Key Items
Background: You should know who founded the franchise, who are they affiliated with, and their experience. This matters to you because a franchise is much like a partnership. It’s important to understand who you are in business with and their history.
Litigation and Bankruptcy: An explanation of any past or ongoing legal disputes the brand is involved with as well as its executives. Franchisors are also required to list any bankruptcies with its affiliates and executives.
Costs/Fees: An explanation of required upfront fees, average investment, and ongoing fees such as royalties and advertising.
Advertising/Training: Includes explanation of how you’ll be supported. If the brand offers national advertising and or local advertising. What is your responsibility? Each franchisor offers different levels of training, either initial or ongoing. Its important to understand since you are expected to follow their model.
Length of agreement, renewal, transfer, termination: Most franchise agreements are 5 to 10 years in length. The FDD will define your options to renew your agreement after the initial term, your rights to transfer (sell) your ownership, and the right on both parties to terminate the agreement before the end of the initial term.
Financial performance: This item highlights sales and earnings claims the franchisor may make about its current franchisees. You can learn how your location may perform. High, low, and medium ranges are sometimes provided. Its important to know that no franchise concept should ever guarantee results.
Financial Statements: A CPA audited financial statements covering the 3 prior years should be made available. This should give you a good understanding of how the franchise performed historically.
What’s next
These are just a few of the things you can expect to learn from the FDD. You should not enter into a franchise agreement until you have carefully reviewed the FDD and also employed a franchise attorney for a thorough review as well.
FDD’s are updated annually and an updated version must be filed in the 2nd quarter of the calendar year for the franchisor to continue selling their franchise opportunity. When considering a franchise opportunity, its important that the franchisor provides you with the FDD and not from another source.
Our brokers have been trained in FDD analysis and we cross reference the brand’s most current FDD before presenting you with a viable franchise opportunity. The importance of having a franchise attorney review this document cannot be overstressed.