What Does a Franchise Disclosure Document (FDD) Contain?
When it’s time to get serious about forming a franchise, one of the final steps is creating the Franchise Disclosure Document, or FDD.
Franchise Disclosure Document (FDD):
The legal document the franchisor provides to the prospective franchisee regarding the franchise opportunity. The FDD contains many disclosures, franchise agreements, and numerous exhibits.
Why Does it Exist?
The FDD became mandatory in 2008 as part of the FTC’s 1978 Franchise Rule. This rule was created to protect franchise candidates from disreputable franchisors, especially those misrepresenting the amount of money franchisees could make.
Franchisors are required to provide a FDD to candidates at least 14 days before a prospective franchisee signs any binding agreement or makes any payment to the franchisor.
FDD: No Quick-Read
FDDs typically run about 100 to 200 pages. Franchise attorneys write these complex legal documents. In order to fully understand the document, consider meeting with both an accountant and a franchise attorney.
All 23 Items of a FDD
The International Franchise Association lists the 23 items in Franchising 101. We break them down below.
Item 1: The Franchisor. This includes both the franchisor and any parent companies, predecessors, and affiliates. It contains the franchise’s history and description.
Item 2: Business Experience. Biographies and professional backgrounds of the franchisors and the franchise’s officers, executives, and directors.
Item 3: Litigation. Any current or previous litigation related to the franchisor and its leaders. This includes both civil and criminal cases.
Item 4: Bankruptcy. List any bankruptcies of the franchisor or management.
Fees and Investment
Item 5: Initial Fees. Cost of the initial fees, plus any factors that determine the amount of the fees.
6: Other Fees. This section includes all other recurring fees.
Item 7: Initial Investment. This section is presented in table format. It includes all the franchisee’s expenditures to establish the franchise.
Restrictions and Obligations
Item 8: Restrictions on Sources of Product/Service. This section contains restrictions on sources of products.
Item 9: Franchisee’s Obligations. This section indicates where in the franchise agreement franchisees can find obligations that they have agreed to. Presented as a reference table.
Financing and Franchisor Assistance
Item 10: Financing. Terms and conditions of any financing agreements that the franchisor offers. (Learn more about franchise financing here.)
Item 11: Franchisor’s Assistance, Advertising, and Training. Further, this section describes the services the franchisor provides the franchisee.
Territory, Trademarks, and More
Item 12: Territory. This section describes exclusive territory.
13: Trademarks. Additionally, list all information about franchisor’s trademarks and service and trade names.
Item 14: Patents, Copyrights, and Proprietary Information. Description of how patents and copyrights can be used by the franchisee.
Franchisee Obligations and Restrictions + Renewal and Termination
Item 15: Franchisee’s Obligation to Participate in the Franchise’s Operations. Further, any of the franchisee’s obligations to participate in the operation of the business.
16: Restrictions on What the Franchisee May Sell. Another restriction to list, this section includes all restrictions on what goods/services can be offered.
Item 17: Renewal, Termination, Transfers, and Disputes. This section describes when/whether your franchise can be renewed or terminated. It also specifies your rights and restrictions during a dispute with the franchisor.
Public Figures, Finances, Information
Item 18: Public Figures. If the company uses public figures, then disclose the amount paid here.
Item 19: Financial Performance. Optional. Franchisor may provide information on the financial performance of franchise units.
Item 20: Franchise Units and Information. A list of franchise locations and contact information. Accordingly, use this information to contact current franchisees.
Item 21: Financial Statements. Last 3 years of audited financial statements.
Contracts and Receipt
Item 22: Contracts. Moreover, this portion contains all agreements the franchisee is required to sign.
Item 23: Receipt. Finally, franchisees sign a receipt that they received the FDD.
Other FDD Resources
For further understanding of the FDD and what it contains, try these resources:
Also learn more about the FTC’s Franchise Rule.