Franchise Advice – What is an FDD?
What is an FDD?
An FDD, or Franchise Disclosure Document, is a legal document that provides information about a franchise, for the prospective franchisee. This document is required by the Federal Trade Commission.
The FDD contains background information about the company and lists 23 items that cover pertinent information about the franchise. This document can be up to 300 pages long! It’s important to be familiar with the Franchise Disclosure Document. We highly recommended that you have a franchise attorney look through the document before signing the agreement.
Following is an overview of the 23 required items to be listed in a Franchise Disclosure Document (FDD).
What are the 23 items in an FDD?
Items 1 through 4 – About the franchisor and their officers.
- Item 1- The Franchisor- Provides the names of the franchisor, their predecessors and their affiliates. It also states the aim of the franchisor’s business and their experience.
- Item 2- Business Experience– Gives you information about the officers, directors and executives of the franchisor.
- Item 3- Litigation History– States if there is any relevant criminal or civil litigation regarding the company or its management.
- Item 4- Bankruptcy– Explains if the company or its managers have declared bankruptcy.
Items 5 through 7 – Fees and Initial Investment
- Item 5- Initial Franchise Fee– Contains the amount the franchisee must pay to acquire the franchise, and how the franchisor settled on this amount.
- Item 6- Other Fees– Includes fees other than the initial franchise fee. These fees include royalties, training fees, advertising contributions and transfer and renewal fees.
Item 7- The Initial Investment– Contains a table with payments (expenses) the franchisee must make to set up the business (including initial franchise fee, real estate, equipment and supplies, signs, advertising, capital, etc). As well as, when and how to make these payments.
Items 8 through 11 – Restrictions, Franchisee’s and Franchisor’s Obligations, Financing
- Item 8- Business Restrictions– Defines restrictions on suppliers, products, equipment, or services related to the franchise.
- Item 9- The Franchisee’s Obligations- Includes wide-ranging information about what the franchisee is required to do.
- Item 10- Financing– States whether or not the franchisor offers financing, and if so, terms will be included here.
- Item 11- The Franchisor’s Obligations– Includes wide-ranging information about what the franchisor is required to do.
Items 12 through 14 – Territory, Trademarks and Patents
- Item 12- Territory– Explains if the franchisee will be granted exclusive rights to a territory and whether the franchisor can set up another unit within it.
- Item 13- Trademarks– Sets out the franchisor’s trademarks, service marks and trade names that will be used.
- Item 14- Patents, Copyrights and Proprietary Information– Contains information on which of these the franchisee may use, and how.
Items 15 through 18 -Type of Participation, Restrictions, Renewal, Transfers and Disputes, Celebrities
- Item 15- Participation- States whether the franchisee must be a hands-on owner, or if they may be an absentee owner.
- Item 16- Product or Service Restrictions- Describes the products or services the franchisee may sell.
- Item 17- Renewal, Termination, Transfers and Dispute Resolution– Consists of a table that set the terms of the agreement. Defines the length of the term, renewals, termination reasons, transfer rights and other items.
- Item 18- Celebrities– Lists the names of any public figures that may be involved in the venture and the details of the celebrity’s agreement.
Items 19 through 21 – Earnings Claims, Other Units, Financial Statements
- Item 19- Earnings Claims– Statement that contains what other franchisees have earned. It is important to note that the franchisor is not required to provide an Earnings Claim and the salesperson is only authorized to state numbers that are disclosed in the FDD. The salesperson, however, will assist the candidate in receiving this information from franchisees, through the due diligence process.
- Item 20- Other Units in the System– Provides information about other franchisees, company-owned outlets, the estimated number of franchises to be sold in the next year and other details.
- Item 21- Financial Statements- Provides audited financial statements of the franchisor for the past three years.
Items 22 and 23 – Agreements and Confirmation of receipt
- Item 22- Agreements– Includes the franchise agreement, and any other agreements.
- Item 23- Confirmation– Contains a receipt that you must sign, which states that the franchisor provided you with the FDD.
Note: Signing Item 23 only means that you received the document, it does not mean that you are obligated to anything stated in the document or that you are signing the franchise agreement.
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Disclosure: Select Franchise Consulting/Trish Benedik/T A Benedik, LLC does not guarantee the financial performance of any franchise, licensed affiliate, or business opportunity. The decision to purchase a franchise, licensed affiliate, or business opportunity must be based on the buyer's independent research and analysis. Select Franchise Consulting/Trish Benedik/T A Benedik LLC is not liable for any representation made by a franchisor and/or a franchisors employee, affiliate, or associate with respect to real estate, financial, operations, or marketing performance of the business being acquired.