A Franchise Disclosure Document (FDD) is a legal document that franchisors in the United States are required to provide to potential franchisees under the Federal Trade Commission’s Franchise Rule.
The FDD offers comprehensive information about the franchise opportunity, providing essential details and disclosures to help potential franchisees make informed decisions.
The FDD typically consists of several sections, known as “Items,” each containing specific information regarding various aspects of the franchise system. These items cover topics such as the franchisor’s background, initial fees and costs, obligations of both parties, litigation history, financial performance representations (if provided), and more.
Here’s an overview of the typical items found in an FDD:
- Franchisor’s Background: Information about the franchisor’s history, business experience, executives, and other important details.
- Business Experience: Details about the business experience of the key individuals involved in the franchisor’s operations.
- Litigation History: Disclosure of any past or ongoing legal actions involving the franchisor, its key executives, or the franchise system.
- Bankruptcy: Information about the franchisor’s or its executives’ bankruptcy filings, if any, within a specified period.
- Initial Fees: Information about the initial franchise fee, other initial costs, and ongoing fees the franchisee is expected to pay.
- Other Fees and Costs: Disclosure of ongoing fees, advertising fees, technology fees, and other expenses related to operating the franchise.
- Franchisee’s Obligations: Details about the responsibilities and obligations of the franchisee as part of the franchise agreement.
- Restrictions and Renewal: Information regarding restrictions on the franchise agreement and conditions for renewal.
- Financial Performance Representations: If provided by the franchisor, this section includes information about the actual or potential financial performance of the franchise.
- Contracts and Agreements: Copies of the franchise agreement, lease agreements, and other contracts related to the franchise.
- Territory Rights: Details about territorial rights or any limitations on exclusive territories.
- Training and Assistance: Information about the training programs, support, and assistance provided by the franchisor.
The FDD is a critical document that provides transparency and enables potential franchisees to thoroughly evaluate the franchise opportunity. It’s recommended that individuals seeking to invest in a franchise carefully review the FDD and seek advice from legal and financial professionals familiar with franchising before making any commitments.