Until the middle ages, the franchise concept seemed far-fetched. It was when the Federal Trade Commission (FTC), the country’s consumer protection league, came up with the idea of regularizing the concept, Franchising and Franchise businesses became more accessible and trustworthy. This legal disclosure document that a business intending to franchise must produce was called the Uniform Franchise Offering Circular (UFOC), later which was renamed the Franchise Disclosure Document (FDD). The FDD is a legal disclosure document that must be given to individuals interested in buying a U.S. Franchise as a part of the pre-sale due diligence process. This document contains detailed information about the business, the business owners, the terms and conditions of services, legal matters, taxation, payments, and more.
In simple words, a Franchise Disclosure Document provides a crystal clear picture of the business relationship between the franchisee and the franchisor. This FDD for franchise business provides critical information about the company when evaluating whether or not to go ahead with the franchise deal.
In favor of the franchisees, there are a couple of ways to access an FDD:
- Legally, the franchisor offering a franchise business by default has to produce in the disclosure process, which is when the candidate is gathering up all information before grabbing on the opportunity. Here, the franchisee is made to sign a receipt to substantiate the delivery of the FDD.
- Alternatively, there are online resources available that are technically public documents. This can be accessed through the FTC website.
What does an FDD Contain?
- Brief about the roles of both the parties involved in the franchise, the franchisee, and the franchisor.
- Brief about how the investment will take place.
- Support structure backed by the franchisor.
A franchise is a license that the franchisee pays for to permit them to have access to the franchisor’s business systems, proprietary knowledge, and trademarks. The license capacitates the franchisee with selling the products or services under the franchisor’s business name. This is made possible with the initial licensing fees and annual royalty fees levied by the franchisor.
Conventionally a franchise is obligated to provide the FDD to the franchisee, free of cost, at least 14 days before any initial money is exchanged.
What the franchisors support the franchisees with varies. From fixing up a location, training, management, marketing, etc. This is where the role of the FDD becomes pivotal.
The Structure of the Franchise Disclosure Document
FDD is made up of twenty-three sections. The content within an FDD may vary from company to company, but the structure remains consistent. These twenty-three sections can be categorized into five main groups:
- Items 1-4: This group consists of information about the identity of the franchisor, the parent company(ies) if any, its predecessors, and its affiliates.
- Items 5-9: This group revolves around the fees involved in starting and operating the business and the range of total initial investment including the franchise fees, royalty fees, advertising fees, technology fees, etc.
- Items 10-18: This group puts forth everything that the franchisee will be entitled to as a franchise owner.
- Items 19-21: This reflects the company’s financial opportunity and health.
- Items 22-23: These circumpass legalities, that need to be understood that a franchisee should agree to once assured to buy the franchise.
Preparing a faulty FDD can cost the company its license to carry out business. Taking the assistance of a seasoned franchise lawyer or consultant solves the purpose and saves the company dollars and avoids trials. As important is paying taxes, an FDD keeps the franchise away from any legal issues.
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