The franchise disclosure document (FDD) is an important document that every prospective franchisee needs to read carefully when buying a franchise. It is usually given to the would-be franchise owner by a franchisor once they fill out and submit their application. This document includes all the essential information about the franchise system and what the franchisor expects from their franchisees, and it is divided into 23 different parts.
The FDD can be lengthy, but don’t let that intimidate you. If you are interested in becoming a franchise owner, it’s important to consult a qualified franchise attorney to read and check the document before taking the next step. Although we will not provide every detail in the FDD word-for-word, we have grouped the sections into five (or) key areas to focus on when reading.
Items 1 — 5
Items 1 and 2 cover the franchisor’s background and previous experience, including information like how long the franchise has been operating, the company’s history, and its main competitors, as well as professional information about the company’s top executives. Item 3 contains the litigation history and shows whether or not the franchise brand or any member of its executive team has committed a serious crime before. If the franchisor or the previous owner of the franchise has ever filed for bankruptcy, it will be discussed in item 4.
Once you have learned about the backgrounds of the franchisor and its executives, Item 5 leads you in a different direction. In this section, you can find the upfront and ongoing costs for opening and running a franchise business. You, the franchisee, will already know about some of these costs, such as the initial franchise fees, but other costs like the launching and training expenses might catch you by surprise. In addition to the assistance of a franchise lawyer, you may also want to get the help of a financial accountant. They can provide you with a cost estimate for your franchise and a timeline for when you can expect the business to break even.
Items 6 — 10
Item 6 is all about the recurring fees, also referred to as other fees, and Item 7 discusses the upfront investment a franchisee needs to make to open a franchise. Information about restrictions regarding the sources of the franchisor’s goods or services (i.e., vendors that you can buy and not buy products from) can be found in Item 8.
Item 9 covers the obligations that the franchise owner has agreed to, usually shown in the form of a reference table. Details about any financing arrangement the franchise has given to the franchisee and its terms and conditions are in Item 10.
Items 11 — 15
Item 11 discusses any services, such as training or marketing programs, that the franchisor has planned to give the franchisee. After reading the FDD, prospective franchise owners are implored to ask the franchisor any questions they have about the training programs, like how long each session will last and the expenses. Item 12 covers the type of territorial protection offered by the franchisor. Items 13 and 14 include information on the usage of the franchise’s trademarks, patents, and copyrights can be used. Item 15 will let you know whether or not you (the franchisee) are obliged to do some actual work in the franchise business. In other words, it explains if you must partake in the business’s daily operation.
Items 16 — 20
In item 16, you will find additional restrictions regarding the products or services the franchisees can offer their customers. People who want to know what is required to renew or terminate the franchise agreement can check it in Item 17. This section also contains information about the transfer of ownership and dispute resolutions. If the franchise company uses a celebrity or a popular influencer to help market their products or service, how much they will collect for this is stated in Item I8. Details about the financial performance of the franchise are in Item 18, but the franchisor is not legally required to provide this information.
Item 20 may be just a few pages long, but it contains information and addresses of current franchises, which could be crucial for prospective franchisees. Before buying a franchise, it is recommended that franchisees contact and schedule meetings with existing and former franchise owners. This will provide them additional insights into what it’s like to run the franchise and let them know the kind of relationship the franchisees have with the franchisor. For many franchisees, that relationship – or lack thereof – can determine whether or not they will buy the franchise.
Items 21 — 23
The last three items of the FDD are basically financial documents and franchise agreements. Item 21 contains the franchisor’s financial statements from the last three years. It would be better to have an accountant go through this section together with you since these statements can reveal the franchise’s ability to grow in the long haul. You can find all the agreements you (the franchisee) need to sign in 1tem 22 (which is titled “contracts). The last item, Item 23, provides the finishing touch. It includes a signed receipt from the prospective franchisee indicating they have gotten the Franchise Disclosure Document (FDD).
