When it’s time to get serious about investing in a franchise, one of the final steps is reviewing the Franchise Disclosure Document, or FDD. Franchises are legally required to provide you with the document, but they are for your benefit, so be sure to review it.
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. They are complex legal documents, written by franchise attorneys. In order to fully understand the document, consider meeting with both an accountant and a franchise attorney.
All 23 Items of an 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. If either the franchisor or its management have gone through bankruptcy, the information is disclosed here.
Item 5: Initial Fees. Cost of the initial fees, plus any factors that determine the amount of the fees.
Item 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.
Item 8: Restrictions on Sources of Product/Service. If any, restrictions on product/service sources are listed here.
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.
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. Any services that the franchisor provides to the franchisee are listed here.
Item 12: Territory. Any exclusive territory is described, plus whether or not it will be modified.
Item 13: Trademarks. 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.
Item 15: Franchisee’s Obligation to Participate in the Franchise’s Operations. Any of the franchisee’s obligations to participate in the operation of the business.
Item 16: Restrictions on What the Franchisee May Sell. All restrictions on what goods/services can be offered are listed here.
Item 17: Renewal, Termination, Transfers, and Disputes. This section describes when and whether your franchise can be renewed or terminated. It also specifies your rights and restrictions during a dispute with the franchisor.
Item 18: Public Figures. If the company uses public figures, the amount they are paid by the company is disclosed 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. Use this information to contact current franchisees. Questions to ask current franchisees here.
Item 21: Financial Statements. Last 3 years of audited financial statements.
Item 22: Contracts. All agreements that the franchisee is required to sign.
Item 23: Receipt. Franchisees are required to sign a receipt that they received the FDD.
Use due diligence. The FTC created a guideline about what a FDD is supposed to contain, but they are unable to check every one. Use this resource wisely.
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.
Before you pursue a specific franchise, ask these franchise selection questions.
Learn the benefits of purchasing a franchise here.