If you're considering buying a franchise, you've probably come across the term "FDD" in your research. You may have asked yourself, "what is the FDD?" In this blog post, we are hoping to help you find the answers to your question.
We recently had a client who was interested in buying a franchise but wasn't quite sure where to start. They had done some research online and had come across the term "FDD," but didn't really understand what it meant or why it was important. That's when they reached out to our attorneys, at Lopes Law.
We explained to our client that the FDD is a critical document for anyone considering buying a franchise. It contains important information about the franchise system, the franchisor (including their background, experience, bankruptcies and any litigation), financial information, and the terms of the franchise agreement. It's difficult to make an informed decision about whether a particular franchise is a good fit, without reviewing the FDD carefully.
Our client was relieved to learn that the FDD was designed to protect them, as a potential franchisee.
In this blog post, we'll dive deeper into the topic of franchising and the FDD. We'll explain what the FDD is, what information it contains, and why it's so important for anyone considering buying a franchise. Whether you're a seasoned entrepreneur, a first-time business owner, or a budding entrepreneur leaving Corporate America to start your own business, understanding the FDD is key to making an informed decision about investing in a franchise.
What exactly is the FDD, and why is it important?
FDD stands for Franchise Disclosure Document. It's a legal document that franchisors are required to provide to potential franchisees under the Federal Trade Commission's (FTC) Franchise Rule. The FDD contains important information about the franchise system, the franchisor, and the terms of the franchise agreement.
By law, franchisors are required to provide the FDD to potential franchisees at least 14 days before the franchisee signs any agreement or pays any money to the franchisor. The purpose of the FDD is to help potential franchisees make informed decisions about whether to invest in a particular franchise. This gives the franchisee time to review the document carefully and ask questions if there's anything they don't understand.
You should have a franchise attorney help you to review the FDD and franchise agreement to help you understand the complex documents, and to help avoid disputes with the franchisor later. Contact us now (or after you've finished this post), to get help with reviewing your FDD or for franchise agreement review.
So what information does the FDD contain? Here are some of the key sections:
1. Franchisor information:
This section provides information about the franchisor, including its business history, litigation history, and bankruptcy filings.
2. Franchisee obligations:
This section outlines the franchisee's obligations under the franchise agreement, including any fees or payments the franchisee will be required to make.
3. Territory:
This section describes the territory that the franchisee will be allowed to operate in.
4. Trademarks and patents:
This section provides information about any trademarks or patents that the franchisor owns or licenses.
5. Initial investment:
This section outlines the estimated initial investment required to start the franchise, including costs for things like equipment, inventory, and training.
6. Other fees:
This section describes any ongoing fees that the franchisee will be required to pay, such as royalties or advertising fees.
7. Renewal, termination, and transfer:
This section outlines the franchisor's policies regarding renewal, termination, and transfer of the franchise agreement.
8. Financial performance representations:
This section provides information about the financial performance of the franchise system, such as sales figures and profit margins. Note that franchisors are not required to include this information in the FDD, but if they do include it, they must have a reasonable basis for the information.
9. Contracts:
This section includes copies of the franchise agreement and any other contracts that the franchisee will be required to sign.
What are the 23 Items in the FDD?
Here is a simple list and explanation of the 23 Items required to be in a FDD. You can contact our franchise attorneys if you need more information.
1. The Franchisor and any Parents, Predecessors, and Affiliates:
This section provides information about the franchisor, including its history, organization, and ownership structure.
2. Business Experience:
This section provides information about the franchisor's key executives and their business backgrounds.
3. Litigation:
This section provides information about any past or pending lawsuits involving the franchisor or its key executives.
4. Bankruptcy:
This section provides information about any past or pending bankruptcy filings by the franchisor or its key executives.
5. Initial Fees:
This section outlines the fees that the franchisee will be required to pay to the franchisor to start the franchise.
6. Other Fees:
This section describes ongoing fees that the franchisee will be required to pay to the franchisor, such as royalties, advertising fees, and other charges.
7. Estimated Initial Investment:
This section provides an estimate of the total costs the franchisee will need to invest to start the franchise.
8. Restrictions on Sources of Products and Services:
This section describes any restrictions on the sources of products and services that the franchisee can use in the franchise.
9. Franchisee's Obligations:
This section outlines the franchisee's obligations under the franchise agreement, such as advertising and marketing requirements.
10. Financing:
This section provides information about any financing programs that the franchisor offers to franchisees.
11. Franchisor's Assistance, Advertising, and Training:
This section describes the franchisor's training and support programs for franchisees.
12. Territory:
This section describes the territory in which the franchisee is authorized to operate.
13. Trademarks:
This section provides information about any trademarks or service marks that the franchisor owns or licenses.
14. Patents, Copyrights, and Proprietary Information:
This section provides information about any patents, copyrights, or other proprietary information that the franchisor owns or licenses.
15. Obligation to Participate in the Actual Operation of the Franchise Business:
This section outlines the franchisee's obligation to participate in the actual operation of the franchise business.
16. Restrictions on What the Franchisee May Sell:
This section describes any restrictions on the types of products or services that the franchisee may sell.
17. Renewal, Termination, Transfer, and Dispute Resolution:
This section outlines the franchisor's policies regarding renewal, termination, transfer, and dispute resolution.
18. Public Figures:
This section provides information about any public figures associated with the franchise.
19. Financial Performance Representations:
This section provides information about the financial performance of the franchise system, such as sales figures and profit margins.
20. Outlets and Franchise Information:
This section provides information about the number and location of current and former franchise outlets, as well as any contact information for current franchisees.
21. Financial Statements:
This section provides the franchisor's audited financial statements.
22. Contracts:
This section includes copies of the franchise agreement and any other contracts that the franchisee will be required to sign.
23. Receipt:
This section includes a statement that the franchisee has received and reviewed the FDD, as required by law.
It's important for prospective franchisees to carefully review each of these items in the FDD before making a decision to invest in a franchise. The FDD provides important information that can help franchisees understand the risks and benefits of the franchise opportunity.
Hire a Franchise Attorney that understands
As you can see, the FDD is a comprehensive document that provides a lot of information about the franchise system. It's important to review the FDD carefully and ask questions if there's anything you don't understand. You may also want to consult with an attorney who specializes in franchise law to help you navigate the process.
At Lopes Law, we have extensive experience working with franchisees and franchisors. If you're considering buying a franchise, we can help you review the FDD and navigate the legal process. Contact us today to schedule a consultation.