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FDD Guide: An Explanation by Popular Questions (Part 2)

What does my investment cover? (Items 11, 13-14)

When you invest in a franchise you are granted permission to use items that pertain to the established branding of the franchisor. These items include trademarks, covered in Item 13, along with copyrights, patents and proprietary information, covered in Item 14. Explanations are made on how confidential information is to be used and protected for the duration of the franchisor-franchisee relationship in addition to the proper usage of the trademarks and actions that are prohibited with these marks.


A franchisor’s system encompasses more than the trademarks and copyrighted information. Item 11 is an extensive look at what the franchisor offers to franchisees in exchange for the fees paid including training programs, pre-opening assistance, ongoing support, computer hardware and software, and advertising.


What are my obligations and restrictions? (Items 8, 9, 12, 15, 16)

Because a franchisee is taking advantage of the franchisor’s experience and procedures, steps must be taken to ensure that the franchisor’s system is protected and well-maintained. Item 9 is a reference table listing where to find expanded explanations, in both the franchise disclosure document and the franchise agreement itself, of the obligations the franchisee must adhere to during the franchisor-franchisee relationship.


Typically, franchisors have made agreements with certain vendors allowing for greater economies of scale. The restrictions the franchisor has on where products must be bought from and what can be sold in the franchised business are explained in Item 16. These guidelines are commonly put in place to maintain uniformity across all franchised outlets to aid in solidifying what the public should expect from the franchisor’s system at any of their outlets. Also related to maintaining uniformity across outlets, Item 8 goes through the restrictions on the products and services the franchisee can provide in his or her franchised business and on the premises of the business.


The territory in which the franchisee will be allowed to operate his or her business along with where he or she will be allowed to solicit customers from is detailed in Item 12. Disclosures are also made on if the franchisor will grant an exclusive or protected territory to the franchisee. If the franchisor grants exclusive or protected territories, instructions on how to deal with a customer that comes to a franchisee from a territory that is not his or hers will be explained (this info is also sometimes present in Item 16 as well).


Item 15 explains what the franchisee’s personal responsibilities are in the operation of his or her franchised business. Whether or not the franchisee must manage the business personally is covered along with training requirements of whoever is designated to supervise the operation of the business (and if an equity interest must be owned in the business by the manager, if the manager is not the franchisee). Also covered is whether or not the franchisee can participate in the operation of any other business ventures while under contract with the franchisor.


What happens when the franchise term ends? (Item 17)

Item 17 details the length of the franchise agreement and procedures for renewing the franchise agreement, if warranted. In some instances, renewal of the franchise agreement is not offered or the franchisee must sign a new franchise agreement to continue the relationship.


Conditions for the franchisee’s exit from the franchisor’s system are also detailed within this Item. Whether it’s by non-renewal of the agreement, transfer of the franchise to another party, or termination of the franchise agreement (initiated by either party), obligations must be met to how the franchisee and franchisor move forward after the relationship has dissolved. Additionally, reasons for these instances to take effect are outlined.


This Item also outlines the procedures for dispute resolution. Many franchisors will have mediation as the first option for dispute resolution. If mediation doesn’t resolve the problem, disputes will most often move to arbitration next with litigation being a last resort. The venue where litigation can be brought up is specified in this Item, typically within the state where the franchisor is located.


What will I have to sign? (Items 22-23)

The document that a prospective franchisee will sign first is the receipt for the FDD, the location for which is denoted in Item 23 (usually the last pages of the Exhibits). There will be two copies: one for the franchisee and other for the franchisor – both must be signed and dated for each party’s respective records. As mentioned earlier, prospective franchisees must be given an FDD no later than 14 days before any contracts are signed or any money is exchanged between the parties.


The contracts to be signed to officially enter the franchisee-franchisor relationship are listed in Item 22 with the Exhibit in which they can be located. They include the franchise agreement, along with additional contracts such as the following, if applicable: confidentiality agreements, leases, finance documents, purchase agreements, service agreements, software agreements, bank draft authorizations, promissory notes, etc. Make sure before signing anything you are clear on the terms of the agreement and what is expected from both sides.


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