What Exactly Is the Franchise Disclosure Document?
One of the most important parts of the franchise investment process is the Franchise Disclosure Document, or FDD. As a franchisor, you are required by law to create and maintain this document for distribution to all franchise candidates.
The FDD is a legal document, so the information contained in it must be accurate. At Accurate Franchising, our more than thirty years’ experience in franchising is a huge asset to you as you embark on the journey to become a franchisor.
Why Is the FDD So Important?
The Federal Trade Commission, or FTC, is the governing body that regulates franchisors in the name of protecting consumers. The FTC requires that franchisors provide factual information about their businesses to franchise candidates BEFORE they sign any contracts or pay any sum of money. The FDD lets the candidate know what to expect as a franchisee and summarizes the legal terms of the franchise agreement.
What Goes into the FDD?
The FDD is made up of 23 items, each of which is required by the FTC. These items give franchise candidates the information they need to make an informed decision about investing with your franchise.
The following is a brief description of each of the 23 items:
- Item 1 — Franchise’s Background: includes how long the franchisor has been in business, special laws for the industry, and parent companies, predecessors, and affiliates.
- Item 2 — Business Background: details the leaders of the franchise and their business experience.
- Item 3 — Litigation History: describes any and all legal action that the franchisor, parent company, partners, affiliates, and the business leaders have been involved in.
- Item 4 — Bankruptcy: lists any bankruptcies for any of the company leaders, the franchisor itself, or parent and affiliate companies.
- Item 5 — Initial Franchise Costs: details the fees and costs involved in franchising, including initial inventory, signs, equipment, and any deposits and fees.
- Item 6 — Other Fees and Expenses: lists the costs and fees for ongoing services like advertising, marketing, and others that are paid to the franchisor/its affiliate or to third parties through the franchisor.
- Item 7 — Initial Franchise Investment: estimates the total cost of opening a franchise to give the candidate an accurate idea of how much the total upfront investment will be.
- Item 8 — Restrictions: lists approved vendors and suppliers from whom your franchisees can purchase supplies; also lists profits that franchisors/affiliates have received from agreements with vendors.
- Item 9 — Obligations of the Franchisee: describes franchise owners’ obligations and points to areas elsewhere in the document/in the franchise agreement where obligations are explained further.
- Item 10 — Financing: outlines financing options available through the franchisor, if available, or other means of indirect financing.
- Item 11 — Obligations of the Franchisor: details the franchisor’s responsibility to franchisees for pre-opening, opening, and post-opening.
- Item 12 — Territory: describes territory protections that the franchisee will receive, including distance between stores; also includes information about other businesses operated by the franchisor and/or its affiliates within a certain distance.
- Item 13 — Trademarks: includes all relevant information regarding required use of trademarks.
- Item 14 — Patents, Copyrights, and Proprietary Information: details patents, copyrights, and proprietary information that franchisees will be required to observe.
- Item 15 — Franchisee’s Obligation to Participate in Franchise’s Operation: details the degree to which franchisees need to be involved in the day-to-day operation of the business.
- Item 16 — Restrictions on Goods and Services: explains the goods and services that a franchise can or cannot offer.
- Item 17 — Renewal of Franchise Agreement and Dispute Resolution Item: describes the franchisee/franchisor relationship, the process for renewing, changing, or ending the franchise agreement, and the means through which any disputes between the franchisee and franchisor will be resolved.
- Item 18 — Public Figures: identifies any public figures who are associated with the franchisor and the figure’s level of involvement.
- Item 19 — Financial Performance Representations: provides information about how franchise locations perform financially. This item is not a requirement.
- Item 20 — Outlets and Franchisee Information: lists all corporate-owned locations and franchise locations within the last three years, including contact information for each one.
- Item 21 — Financial Statements: includes audited financial statements for the company over the last three years.
- Item 22 — Contracts: provides a list of all the contracts franchisees will be required to sign.
- Item 23 — Acknowledgement of Receipt: proves that the franchisee candidate has received and read the FDD.
As you can see, there is a lot that goes into creating this document and no detail should be overlooked. Let the experts at Accurate Franchising help you! Contact us to get started!
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