What is a 'Franchise disclosure document'

The franchise disclosure document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. It contains information essential to potential franchisees about to make a significant investment.

BREAKING DOWN 'Franchise disclosure document'

The financial disclosure document outlines comprehensive information about the roles of both parties involved in the franchise — the franchisor and the franchisee. The document allows the potential franchisee to make an honest and informed decision about his investment into the business. The document is divided up into 23 sections that the potential franchisee must review before signing. 

History of the FDD

The FDD was previously known as the uniform franchise offering circular (UFOC) before it was revised by the Federal Trade Commission, the country's consumer protection agency, in July 2007. Franchisors had until July 2008 in order to comply with the revisions. It has also been known as the uniform franchise disclosure document.

Franchise Disclosure Document: Rights of the Franchisee 

According to the FTC, franchisors have an obligation to provide the franchisee with the financial disclosure document at least 14 days before it needs to be signed or before any initial money is exchanged. The franchisee has a right to a copy of the FDD after the franchisor has received the application and agreed to consider it. 

Franchise 101 

A franchise is a type of license that a party (the franchisee) acquires to allow them to have access to a business's (the franchisor) proprietary knowledge, processes and trademarks. This gives the franchisee the ability to sell a product or provide a service under the business's name. The franchisee usually pays the franchisor an initial start-up and annual licensing fees in exchange for gaining the franchise. 

The franchisor may help the franchisee find a location, training and advice on management, marketing or personnel. But the relationship does not necessarily end after the initial startup. Rather, the franchisor may also provide support through newsletters, a toll-free telephone number, a website or scheduled workshops or seminars.

Although buying a franchise may come with training, support and brand power, it is like any other investment: There is no guarantee of success. Anyone who may entertain the idea of opening up a franchise should weigh the pros and cons before doing so.  

Nevertheless, there is guidance available for anyone interested in being a franchisee. The FTC developed a guide to help those who are interested in going into business by buying a franchise.   

Sections of the FDD

The FDD contains information essential to potential franchisees about to make a significant investment. These include:

  1. The franchisor and any parents, predecessors, and affiliates
  2. Business experience
  3. Litigation
  4. Bankruptcy
  5. Initial fees: A franchisor must disclose any fees charged to franchisees. 
  6. Other fees: This section must also include any other fees. Any hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful and fully transparent. 
  7. Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of his working capital. 
  8. Restrictions on sources of products and services 
  9. Franchisee’s obligations
  10. Financing
  11. Franchisor’s assistance, advertising, computer systems, and training
  12. Territory: While there is no obligation to give a franchisee any range or territory to do business, this is the space to indicate any geographical restrictions a franchisor is putting on the franchisee.  
  13. Trademarks
  14. Patents, copyrights, and proprietary information
  15. Obligation to participate in the actual operation of the franchise business
  16. Restrictions on what the franchisee may sell
  17. Renewal, termination, transfer, and dispute resolution
  18. Public figures
  19. Financial performance representations
  20. Outlets and franchisee information
  21. Financial statements: A franchisor must provide three years of financial statements to the franchisee as part of the financial disclosure document. This includes balance sheets, statements of operations, owner’s equity and cash flows. 
  22. Contracts: This is where the franchisor outlines the franchise agreement. It may also include financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other contracts specific to the franchise's situation.
  23. Receipts: This is the last and final section of the FDD. Here, the franchisor will review the disclosure and business decisions outlined between the two parties and provide the franchisee with any additional information.  

The FDD: Examples of Popular Franchises

Examples of popular, well-known franchise businesses include fast food companies like McDonald's, Subway, Baskin-Robbins, Dunkin' Donuts. There are also other business opportunities for potential franchisees outside of the fast food industry including UPS and H&R Block. According to Franchise Direct, which connects franchisors and franchisees with support and resources, the top five franchises in 2017 across the globe were McDonald's, KFC, Burger King, Pizza Hut and 7-Eleven. 

 

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