Prior to signing anything, franchisors are required to provide franchisees with a Franchise Disclosure Document (FDD). This disclosure is required by the FTC’s Franchise Rule. Although these rules are made to protect the franchisee, disclosures benefit the franchisor as well. The more informed a prospective franchisee, the better prepared they are to run your business. Non-compliance can result in serious legal consequences for your franchise, so ensure your company carefully follows regulation.
Part 1 of this 3 Part Compliance series looks at the formats and people involved in a FDD, along with rules on recordkeeping and prohibitions.
Who is Involved?
It is the responsibility of the franchisor or sub-franchisor to both prepare and furnish the FDD. This doesn’t include brokers or any other third-parties. Both the franchisor and sub-franchisor are held responsible for the actions of the other.
The person receiving the FDD is the prospective franchisee. The prospective franchisee must have a legitimate interest in creating a business partnership, not just curiosity. Curiosity alone does not require the franchisor to furnish the document. Someone with sufficient interest may have gone through an application process. If both the franchisor and the prospective franchisee are interested in entering business, then that is the time to present the FDD.
Persons not included are current franchisees or transferees. A transferee is someone who purchased a franchise unit(s) directly from a franchisee. In this scenario, the franchisor is not required to present the FDD. If a current franchisee is renewing their agreement with the franchisor or if the franchisee is purchasing additional units, he or she is not entitled to the FDD.
How to Furnish the FDD
The document must be a single document, and not given in parts. Almost any tangible format that can be read and interpreted may be used by the franchisor. This does include electronic formats, but the rules are strict. All information must be on the electronic copy itself, not offered from links to external pages/sites, pop-ups, audio, or video. What is allowed: scroll bars, search tools, and internal links (other pages within the document). Additionally, if sent electronically, it must be downloadable and printable. A franchisor may supplement the electronic or printed format with the same information offered on other mediums (for example, a cd with a video), but this must be in addition to, not in place of.
The FDD must be received 14 calendar days before the franchisee create a binding agreement. Item 23 of 23 of the document includes a receipt that the franchisee must sign, acknowledging that he/she received the document. 14 days after the date signed on the receipt, the franchisor and franchisee may enter business. If the prospective franchisee requests the document before the 14 day period, the franchisor has to make it available to him/her.
No fees may be charged related to the franchisee’s right to receive an FDD.
There are two major recordkeeping requirements for the FDD.
- Franchisors must retain samples of each materially different version of the FDD for at least 3 years. This must be made available upon the FTC’s request.
- The franchisee’s signed receipts acknowledging the reception of the FDD must be kept for at least 3 years as well.
The franchise seller is not allowed to make any statement that contradicts the information disclosed in the FDD. This includes statements delivered orally, visually, or in writing. If statements are truthful and non-contradictory of the FDD, they may be stated.
Franchisors take on the full responsibility of ensuring the FDD is presented in the proper format and in proper advance of a franchise sale. The company needs to keep careful records and make sure that no other communications are inconsistent with the document. In Part 2, we explore how the document needs to be written.
Continue with Part 2 of our series.