The Franchise Disclosure Document (FDD) - An Overview
If you're serious about buying a franchise, at some point you're going to receive and review a Franchise Disclosure Document (FDD). The purpose of the FDD is to give the potential buyer detailed information on the investment details, ongoing fees and obligations of both the franchisor and franchisee. According to federal law, governed by the Federal Trade Commission (FTC), you must receive a copy of the FDD a minimum of 14 days prior to signing any agreement with the franchise.
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The FDD provides an overview of:
- The management structure and history of the franchise
- Experience of key personnel
- Litigation history
- The initial investment and ongoing fees
- Obligations of all parties
- List of current and former franchisees
- Trademarks, patents and copyrights
- Details on training and support
- Financial performance (If the franchise elected to provide)
- The Franchise Agreement
The FDD format is standard and contains 23 items. Each item provides specific details on the franchise opportunity. This document is typically drafted by an attorney and will contain a lot of legal phrases and definitions. You should have a qualified franchise attorney review the document as they can help explain what is being disclosed and more importantly, negotiate the franchise agreement. Some of the more seasoned franchise systems will not negotiate the document. In any instance, you will want to understand what you're signing to be aware of the risks and obligations of the franchise agreement.
Here's an overview of each item:
Item 1. The Franchisor and Any Parents, Predecessors, and Affiliates: This section explains the history of the franchise.
Item 2. Identity and Business Experience of Key Persons running the franchise.
Item 3. Litigation History - Details of any outstanding lawsuits
Item 4. Bankruptcy History - Details of any bankruptcy history of the franchise
Item 5. Initial Fees - Franchise Fee and any other fees required when signing the agreement.
Item 6. Other Fees and Expenses - Details on the ongoing royalty, advertising and any other ongoing fees.
Item 7. Initial Investment: An Estimate of the initial investment to start the business
Item 8. Restrictions on Sources of Products and Services
Item 9. Obligations of the Franchisee -
Item 10. Financing Arrangements - Details of franchise provided financing.
Item 11. Obligations of the Franchisor
Item 12. Territory - Details on the territory awarded and what protections are provided.
Item 13. Trademarks - Details on franchise trademarks.
Item 14. Patents, Copyrights, and Proprietary Information
Item 15. Obligation to participate in the Actual Operating of the Business - Details on how much time you are required to operate the business.
Item 16. Restrictions on Goods and Services Offered by the Franchisee
Item 17. Renewal, Termination, Repurchase, Modification and/or Transfer of the Franchise Agreement, and Dispute Resolution
Item 18. Public Figures - Are their any public figures endorsing the franchise.
Item 19. Financial Performance Representations (FPR or Earnings Claim) - Details of the financial performance of the model. Franchises can elect TO NOT make an FPR.
Item 20. List of Franchise Outlets - Number of current franchise locations as well as the number who have entered or left the franchise.
Item 21. Financial Statements of Franchisor
Item 22. Contract - The Franchise Agreement
Item 23. Acknowledgment of Receipt
The FDD is only part of your due diligence process. When considering franchise ownership there are several items to consider. Will the franchise work in your market? Do you have the ability to own and operate the business? Is the business viable? Will you be happy owning and operating the business and does it fit with your ideal lifestyle? I recommend speaking with a qualified franchise attorney, CPA and Financial Advisor. They can help you with your due diligence, determine suitability and formulate a strategy for financing.
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