The Franchise Disclosure Document (FDD) and Why is it Important
A Franchise Disclosure Document (FDD) is a legal document the Federal Trade Commission (FTC) requires franchisors to provide prospective franchisees with information about the company and franchise system. The franchisees will need to sign this document and agreement to show they are making an informed decision regarding buying and starting a new franchise location before the business relationship can be completed.
Nonetheless, the FTC provides cautionary advice regarding the FDDs: "To protect you, we've required your franchisor to give you this information. We haven't checked it, and don't know if it's correct. It should help you make up your mind. Study it carefully. While it includes some information about your contract, don't rely on it alone to understand your contract. Read all of your contract carefully. Buying a franchise is a complicated investment. Take your time to decide. If possible, show your contract and this information to an advisor, like a lawyer or an accountant.... There may also be laws on franchising in your state. Ask your state agencies about them."
The Franchise Disclosure Documents enable the franchisees to make well-informed and wise decisions on whether running a specific franchise is the best option for them. With twenty-three mandatory items on the legal document, the FDD can run anywhere between 100 to 200 pages long. However, just like buying a car and having an experienced mechanic inspecting it first, you should bring in an experienced franchise attorney to review the document before signing on the dotted line.
Within the FDD, the potential franchisee and their franchise law attorney will review all sections carefully within the evaluation process. These items include:
1. The franchisor and any parents, predecessors, and affiliates
2. Business experience
5. Initial fees
6. Other fees
7. Estimated initial investment
8. Restrictions on sources of products and services
9. Franchisee’s obligations
11. Franchisor’s assistance, advertising, computer systems, and training
14. Patents, Copyrights, and proprietary information
15. Obligation to participate in the actual operation of the franchise business
16. Restrictions on the franchise may sell
17. Renewal, termination, transfer, and dispute resolution
18. Public figures
19. Financial performance representations
20. Outlets and franchisee information
21. Financial statements
By the end of the FDD, you should have your potential franchise obligations spelled out within the legal agreement. These required items will support your franchise research as you make an educated decision on buying a specific franchise. The more extensive the document is, the more information you will have to educate your decision.
Even though buying a franchise comes with brand recognition and marketing support, there are still several factors to take into consideration. Potential franchisees should weigh and assess each pro and con carefully as they read through the FDD. Committing to due diligence early in the process will help you feel confident in your franchise agreement and have your best interests protected. Don’t worry – you should not feel rushed in this process – the FTC obligates the franchisors to give the franchisees a minimum of fourteen days before the FDD would need to be signed. This gives you time to consider your options and have a clear picture of what the FDD lays out.
If you are thinking about buying a franchise and need assistance reviewing your FDD, let us help guide you through the purchase process. Dye Culik PC is a Charlotte, North Carolina business and franchise law firm. Our attorneys represent small-business owners in all aspects of business and franchise law, franchise disputes, and other corporate legal issues. We'd love to talk with you if you are thinking of buying a franchise and are here to help throughout the journey.