After doing some research and identifying a few franchisors with good reputations that match your criteria for industry, lifestyle preferences, and investment level, you’re ready to contact them. This is when you begin to establish a substantive relationship with a franchisor, including paperwork.
Franchises operating in the U.S. are regulated in part by the Federal Trade Commission (FTC). To ensure that franchises are making honest and full disclosure about their franchise operations.
Although not subject to federal approval, the FDD must meet legal approval in these fourteen states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North and South Dakota, Rhode Island, Virginia, Washington and Wisconsin.
And though other states do not require approval of the FDD, the franchisor must be registered with the state in order to sell franchises there.
The FDD is intended to prepare and protect prospective franchisees as much information as possible about the franchise before an agreement is signed.
The FDD will supply you with information about:
- The company’s management structure, history and franchise experience.
- Legal status and any litigation history, including past and pending cases
- Fee schedules for opening, operating and terminating the franchise.
- Details of any financial arrangements the franchisor offers to franchisees.
- Any restrictions on products and services offered, as well as territorial protection rights.
- Data on existing franchises, such as how many are currently operating, how many have been opened, close or transferred in the past year.
- Trademarks, patents, copyrights and other proprietary assets.
- What is required of the franchisee in the relationship, and mutual expectations for both parties.
The FDD is a comprehensive document with 23 sections and additional exhibits. For detailed information on the 23 sections within a standard FDD, please see our FDD Guide. Also, it is wise to have a lawyer experienced with franchise contracts review it with you. Check with your state’s Bar Association to find a franchise business lawyer.
The FTC mandates that a Franchise Disclosure Document (FDD) be provided to the prospective franchisee no later than two weeks before any binding documents are signed. This period begins with the signing of a receipt. The receipt does not establish any obligation on your part, it just acknowledges that you have received the FDD.
It is essential that you understand all sections covered in the FDD. Ask your lawyer to explain anything you don’t understand. The FDD is basically your starting point for negotiating the terms of the Franchise Agreement. It should smooth out most to all of the questions and issues you have about the franchise operation.
Though uniformity is a hallmark of franchising, there is sometimes room for negotiating the terms of the Franchise Agreement. Remember, the Franchise Agreement is a legal contract, so don’t sign it before you have satisfactorily worked out any concerns with your franchisor.