Franchise Disclosure Document (FDD)

What Is a Franchise Disclosure Document (FDD)?

The franchise disclosure document (FDD) is a legal disclosure document that must be given to people keen on buying a U.S. franchise as part of the pre-deal due diligence process. The document contains information essential to potential franchisees going to make a huge investment.

The FDD was recently known as the Uniform Franchise Offering Circular (UFOC) before it was amended by the Federal Trade Commission (FTC), the country's consumer protection agency, in July 2007. Franchisors had until July 2008 to consent to the corrections. The FDD has likewise been alluded to as the Uniform Franchise Disclosure Document.

Understanding a Franchise Disclosure Document (FDD)

The FDD frames thorough information about the jobs of the two players engaged with the franchise — the franchisor and the franchisee — and is intended to empower the potential franchisee to come to a legitimate and informed conclusion about their investment into the business. The document spreads out how the investment will function in practice for the potential franchisee, which is critical in light of the fact that a franchise is an alternate type of investment/business.

A franchise is a license that a party (the franchisee) gains to allow them to approach a business' (the franchisor) proprietary information, processes, and trademarks. Empowers sell a product or offer a support under the business' name. In exchange for acquiring the franchise, the franchisee normally pays the franchisor an initial beginning up and annual licensing fees.

The franchisor may help the franchisee with finding a location, training, and guidance on management, marketing, or personnel. The relationship doesn't be guaranteed to end after the initial beginning up, all things considered. The franchisor may likewise offer help through bulletins, a complementary telephone number, a website, or scheduled studios or classes. Since franchises can be so fluctuated in their approach, the job of the FDD is to explicitly spread out what endlessly won't be given to the franchisee and how the relationship will function proceeding.

It is worth taking note of that, despite the fact that buying a franchise might accompany training, support, and brand power, it resembles some other investment — there is no guarantee of progress. Any individual who might engage opening up a franchise ought to carefully gauge the upsides and downsides before doing as such. The FDD is a critical source of information for that evaluation cycle.

Requirements for a Franchise Disclosure Document (FDD)

The FDD is split into 23 sections and the potential franchisee must audit every one of them before signing.

As indicated by the FTC, franchisors have an obligation to give the franchisee the FDD something like 14 days before it should be marked or before any initial money is exchanged. The franchisee has an option to a copy of the FDD after the franchisor has received the application and agreed to think about it.

Sections of the Franchise Disclosure Document (FDD)

The FDD contains information essential to potential franchisees going to make a critical investment. Each document is required to contain the following sections in the order determined below:

1. The franchisor and any parents, ancestors, and affiliates: This section lays out how long the franchisor has been operating.
2. Business experience: Outlines the experience of the executive team running the franchise system.
3. Litigation: Covers pending activities, material activities, and prior activities against the franchise.
4. Bankruptcy: [Bankruptcies](/chapter 11) including the franchise, its ancestors, and its affiliates must be uncovered.
5. Initial fees: A franchisor must uncover any fees charged to franchisees.
6. Other fees: Hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful to uncover all charges and be completely transparent.
7. Estimated initial investment: The franchisee must know about what the low and high scope of the initial investment must be, including an estimate of their working capital.
8. Restrictions on sources of products and services: Covers any required purchases of goods and services, as well as revealing any ownership or financial relationship between the franchise and required providers.
9. Franchisee's obligations: Lays out the franchisee's obligations in a reference table.
10. Financing: Outlines the conditions of any financing arrangements.
11. Franchisor's assistance, advertising, computer systems, and training: Explains the pre-opening and continuous assistance that the franchisee can anticipate from the franchisor.
12. Territory: While there is no obligation to give a franchisee any reach or region to carry on with work, this is the space to show any geographical limitations a franchisor is putting on the franchisee.
13. Trademarks: Discloses the trademarks registered to the franchise.
14. Patents, copyrights, and proprietary information: This section uncovers patents, copyrights, and other protected information not covered under the trademarks section.
15. Obligation to participate in the real operation of the franchise business: This makes it explicit whether the franchise can be held as a careful distance investment or whether direct participation is expected.
16. Restrictions on what the franchisee may sell: Covers whether just franchise approved goods and services can be sold.
17. Renewal, termination, transfer, and dispute resolution: Outlines the depicted processes.
18. Public figures: Covers any person whose name or physical appearance is associated with the franchise. For instance, a particular VIP who shows up in franchise plugs.
19. Financial performance representations: A discretionary space for a franchisor to estimate a franchise's potential performance in view of reasonable presumptions.
20. Outlets and franchisee information: Where the franchise details are unveiled with regards to the number of company-owned outlets and franchised outlets in operation throughout the previous three years.
21. Financial statements: A franchisor must give three years of financial statements to the franchisee as part of the FDD. This incorporates balance sheets, statements of operations, proprietor's equity, and cash flows.
22. Contracts: This is where the franchisor frames the franchise agreement. It might likewise incorporate financing agreements, product supply agreements, personal guarantees, software licensing agreements, and some other contracts specific to the franchise's situation.
23. Receipts: This is the last section of the FDD. Here, the franchisor will audit the disclosure and business decisions framed between the two parties and give the franchisee any extra information.

Highlights

• The franchise disclosure document (FDD) gives a reasonable image of how the business relationship between the franchisee and franchisor will be led.
• The FDD is a critical source of information while assessing whether to turn into a franchisee, and the FTC has made the document a legal requirement.
• Franchises can be totally different in the support they offer in return for licensing fees.