FRANCHISE DISCOVERY: WHAT IS THE FDD?

Understanding The Franchise Disclosure Document (FDD)

Watch The Youtube Playlist - What Is The FDD?

The Franchise Disclosure Document is a legal disclosure document that must be provided to you as part of the presale due diligence process. However, we always recommend having a franchise attorney review your franchise agreement as well as the franchise disclosure document before you make a decision.

Item 1 - The Franchisor & any Parents, Predecessors, and Affiliates

The franchisor must disclose its corporate information, including information about affiliated and parent companies of the franchisor.

Item 2 - Business Experience

The franchisor must disclose information about the franchisor’s management team.

Item 3 - Litigation

The franchisor must disclose certain types of litigation that currently involves or previously involved the franchisor, the franchisor’s affiliates, predecessors, and/or individual management team members identified in item two.

Item 4 - Bankruptcy

The franchisor must disclose whether or not the franchisor, the franchisor’s affiliates, predecessors, and/or individual management team members identified in item two previously filed for bankruptcy.

Item 5 - Initial Fees

The franchisor must disclose all upfront fees that a franchisee must pay to the franchisor before the franchisee opens the franchised business.  The most common initial fees disclosed in item 5 include the initial franchise fee and other upfront pre-opening fees that may be paid to the franchisor such as fees for opening inventory and equipment.

Item 6 - Other Fees

The franchisor must disclose all other fees that a franchisee must pay to the franchisor throughout the terms of the franchise agreement.  These fees typically include on-going royalties, brand development fund, marketing, technology, training, and other fees specific to the franchisor.

Item 7 - Estimated Initial Investment

The franchisor must include a low to high estimate of the estimated cost for a franchisee to establish and open the franchised business.  This estimate must include everything from build-out costs to reserve capital for the first three months of operation.

Item 8 - Restrictions on Sources of Products & Services

The franchisor must disclose what products and supplies the franchisee must purchase from the franchisor or the franchisor’s designated suppliers.  Within Item 8 the franchisor must also disclose revenue and rebates that the franchisor earned from selling the source-restricted supplies and products to the franchisees.

Item 9 - Franchisee’s Obligations

The franchisor must disclose in table format, the franchisee’s obligations under the franchise agreement.  This table includes summary of all legal obligations ranging from site selection and opening to default provisions and the franchisee’s obligations upon termination of the franchise agreement.

Item 10 - Financing

The franchisor must disclose whether or not the franchisor offers franchisees financing as to initial fees to be paid by the franchisor or in connection with the franchised business.

Item 11 - Assistance, Advertising, Computer Systems & Training

The franchisor must disclose the type of assistance and training that the franchisor will provide to the franchisee, advertising requirements imposed on the franchisee, and the required computer and software systems that the franchisee will be required to purchase and utilize.

Item 12 - Territory

The franchisor must disclose if the franchisee will be awarded a protected territory, whether or not the territory is protected, how the territory will be determined, and instances where the franchisor reserves the right to operate within the franchisee’s territory.

Item 13 - Trademarks

The franchisor must disclose information about the trademarks of the franchise system including whether or not they are registered with the United States Patent and Trademark Office, their registration status, and whether or not the franchisor has notice of a trademark conflict or dispute.

Item 14 - Patents, Copyrights & Proprietary Information

The franchisor must disclose information about any patents, copyrights and other proprietary information that is related to the franchise system.

Item 15 - Obligation to Participate in the Actual Operation of the Franchise Business

The franchisor must disclose what obligations, if any, the individual franchisees/franchise owners must have in the day-to-day operations of the franchised business including whether or not they must work in the franchised business on a full time basis.

Item 16 - Restrictions on What the Franchisee May Sell

The franchisor must disclose its control over what a franchisee may or may not sell as a part of the franchised business.

Item 17 - Renewal, Termination, Transfer and Dispute Resolution

The franchisor must disclose and summarize the legal rights and obligations related to the renewal, termination, and transfer of the franchised business. This item must also include a summary as to how legal disputes must  be resolved between the franchisor and franchisee.

Item 18 - Public Figures

The franchisor must disclose if there are any celebrities or other public figures that have been hired to promote the franchise system.

Item 19 - Financial Performance Representations

The franchisor must include a low to high estimate of the estimated cost for a franchisee to establish and open the franchised business.  This estimate must include everything from build-out costs to reserve capital for the first three months of operation.

Item 20 - Outlets & Franchisee Information

The franchisor must disclose in five separate tables, a summary of the franchised and corporate outlets over the prior three years and a projection as to future opening in the next year.

Item 21 - Financial Statements

The franchisor must disclose and include copies of the franchisor’s financial statements.

Item 22 - Contracts

The franchisor must list and attach as an exhibit all contracts and that franchisee must sign with the franchisor.  These contracts include a sample of the franchisor’s standard franchise agreement and related agreements such as a development agreement, site selection agreement, release agreement and others.

Item 23 - Receipts

The franchisor must include two copies of the receipt page.  The receipt page is the page that a franchisee must sign to confirm and prove the proper disclosure and delivery of the FDD.