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Recent research has stated that it takes an average of more than 20 years of education to understand a U.S. franchise disclosure document. We seek to drastically reduce that learning curve.
What is a Franchise Disclosure Document?
The Franchise Disclosure Document (FDD) is a comprehensive document provided by the franchisor that outlines, in detail, several aspects of a particular franchise. The FDD was formerly called a Uniform Franchise Offering Circular (UFOC).
The FDD has 23 sections, which will supply you with information about:
- The company’s history, and management structure.
- The company's legal status and any litigation history, including pending cases.
- Estimated fees for opening, operating, and terminating the franchise.
- Trademarks, patents, copyrights and other proprietary assets the franchisor has.
- Details of any financial assistance the franchisor offers to franchisees.
- Assistance the franchisor offers before and during the franchise agreement, including training and marketing.
- If there are territorial protection rights.
- Obligations and restrictions the franchisee will have during the relationship.
- The length of the franchise term and requirements for renewal, if available.
- Data on existing franchises, such as how many are currently operating, and how many have been opened, closed or transferred in the past year.
In addition, the FDD has additional exhibits, which commonly supply you with the following:
- A contact list of current franchisees in the system
- The franchisor's recent financial statements
- A copy of the franchise agreement
- The table of contents for the operations manual
- State law addendums
- Effective dates
The FDD should address virtually all of the questions and concerns you have about the franchise operation you are considering becoming a part of.
Why the FDD Exists
The FDD is a requirement of the Federal Trade Commission (FTC).
To ensure that franchises are giving prospective franchisees the proper amount of information needed to make an educated decision, the FTC mandates that a Franchise Disclosure Document (FDD) be provided to the prospective franchisee no later than 14 days before any binding documents are signed.
(The 14-day period begins with the signing of a formal receipt. The receipt does not establish any obligation on your part, it simply acknowledges that you have received the FDD.)
The FDD isn't subject to federal approval. However, in some states the FDD must be registered and meet approval standards.
These states are:
- California
- Hawaii
- Illinois
- Indiana
- Maryland
- Michigan
- Minnesota
- New York
- North Dakota
- Rhode Island
- Virginia
- Washington
- Wisconsin
There are also other states which don't require registration of the FDD, but do require the franchisor to file its FDD with the state in order to sell franchises there.
These states are:
- Connecticut
- Florida
- Kentucky
- Maine
- Nebraska
- North Carolina
- South Carolina
- South Dakota
- Texas
- Utah
Don't Review the FDD Alone
It is essential that you understand all sections covered in the FDD. A wise move is to have a lawyer experienced with franchise contracts review it with you. Ask your lawyer to explain anything you don’t understand.
In addition, though uniformity is a hallmark of franchising, there is sometimes room for negotiating the terms of the franchise agreement. The FDD can serve as a starting point for negotiating certain terms.
Remember, the franchise agreement is a legal contract, so don’t sign it before you have satisfactorily worked out any concerns with your franchisor. And knowing what concerns you may have personally with a franchise purchase begins with a thorough review of the FDD.
For more detailed information, please see our FDD Guide.
Suggested reading:
- The Ultimate Guide to Franchising
- What is Franchising?
- The Benefits of Franchising
- Choosing the Most Profitable Franchise for You
- 11 Key Steps in Opening a Franchise
- Franchises vs. Business Opportunities
- The Cost to Start a Franchise and Financing Options
- Basics of the Franchise Disclosure Document (FDD)
- Creating a Business Plan for Your Franchise
- Completing and Signing a Franchise Agreement