The Franchise Disclosure Document (FDD) is a legal disclosure document that a franchisor must provide to prospective franchisees before they can purchase a franchise. The FDD lists key information about the franchisors and the company's business operation, such as financial performance, litigation history and other important details of doing business with that organization.
The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. It is important to note that the FDD is prepared and written by the franchisor's attorney and accountant, and as such, it focuses on the franchisors' positive aspects.
That said, simply understanding what an FDD contains goes a long way to helping prospective franchisees as they assess whether investing in a particular franchise is good for them. Understanding the various sections of an FDD is an important first step in making an informed decision when purchasing a franchise.
Items Contained in a Franchise Disclosure Document
• Item 1: The franchisor and any parents, predecessors and affiliates. This section provides a description of the franchisor and its history.
• Item 2: Business experience. This section contains biographical and professional information about the franchisors and its executives, officers, and directors.
• Item 3: Litigation. This section provides any relevant current and past criminal and civil litigation for the franchisor and its management team.
• Item 4: Bankruptcy. This section contains information about the franchisor and any management who have filed for bankruptcy.
• Item 5: Initial fees. This section provides information about the initial fees to purchase a franchise location, and the factors that determine the amount of the fees paid by a franchisee.
• Item 6: Other fees. This item provides a description of all other recurring fees or payments that are required by a franchisee.
• Item 7: Initial investment. This section includes all financial expenditures required by the to establish the franchise in a new location.
• Item 8: Restriction on sources of services and products. This section includes the restrictions that franchisor has established regarding the source of products or services.
• Item 9: Franchisee's obligations. This item provides a reference table that indicates where in the franchise agreement franchisees can find the various obligations they have agreed to in purchasing a franchise.
• Item 10: Financing. This section of the FDD describes the terms and conditions of any financing arrangements offered by the franchisor (if any).
• Item 11: Franchisor's Assistance, Advertising. Computer Systems and Training. This section describes the various services and support that the franchisor will provide to the franchisee.
• Item 12: Territory. This section provides a detailed description of any exclusive territory and whether territories could be modified.
• Item 13: Trademarks. This section provides information about the franchisor's trademarks as well as service and trade names.
• Item 14: Patents, copyrights and proprietary information. This section provides information about how the patents and copyrights can be used by the franchisee.
• Item 15: Obligation to participate in the actual operation of the franchise business. This item describes the obligation of the franchisee to participate in the day-to-day operation of the business.
• Item 16: Restrictions on what the franchisee may sell. This section details any restrictions on the goods and services that the franchisee may offer its customer base.
• Item 17: Renewal, termination, transfer, and dispute resolution. This section tells you when and whether your franchise can be renewed or terminated, and what a franchisee’s rights and restrictions are if you have disagreements with your franchisor.
• Item 18: Public Figures. If the franchisor uses public figures (celebrities, for example) the amount the person is paid for their services is revealed in this section.
• Item 19: Financial Performance Representations. In this section of the FDD the franchisor is allowed - but not required - to provide information on average unit historical financial performance.
• Item 20: Outlets and Franchisee Information. This section provides current franchise locations and contact information of existing franchises.
• Item 21: Financial statements. In this section the franchisor provides audited financial statements for the past three years.
• Item 22: Contracts. This section contains all the agreements that the franchisee will be required to sign before purchasing a franchise.
• Item 23: Receipts. Prospective franchisees are required to sign a receipt that they have received a copy of the FDD.
The team at Franchise@50 has reviewed thousands of these documents, both as a prospective franchisee and as a business advisor to our clients. We’ll be able to help you identify opportunities as well as potential challenges with each franchise opportunity that you are evaluating.
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