Franchise Disclosure Document
What You Need to Know about an FDD and What It Will Tell You
When you get information from a franchisor about how to get a franchise, this document is called a Franchise Disclosure Document, or FDD.
It can actually consist of a number of documents, a video or DVD, and it may or may not have an application in the package. This package used to be called a Uniform Franchise Offering Circular (UFOC).
What Is In an FDD?
The FDD is what is now required by law to be given to prospective franchisees. It is the same for every franchisor, so any FDD you get from different franchisors will contain the same information – but with statistics for that particular company.
The document must contain:
- A History of the Company
- The Costs Involved in Starting a Franchise
- Legal Obligations of Both Parties
- Statistics of the Franchised Businesses
- Financial Reports (Audited)
Some companies may also opt to include possible performance information. In other words, it discloses what kind of profit a franchisee might expect to see. This information is not required.
What Franchise Information Should Especially Be Noted?
The Franchise Disclosure Document contains a lot of information. You may not receive it the first time you meet, but you must get it 14 calendar days prior to signing any agreement. Also, any actual agreement must be given to you five calendar days before signing.
Some information you want to especially look at is the history of the company and what kind of litigation has there been in the past – or is taking place now. Obviously, if it is facing large lawsuits – then the franchisor may be in danger of going out of business.
You will want to be sure to notice information about the franchisees. This information will tell you how long franchisees stay with the company, and if any franchisees have been terminated – and why. You can also learn how many new franchises have been started recently and how many have closed. This information, along with the financial information, will enable you to see the overall trend of what is happening with the company, and whether or not franchisees are generally happy with it. You will also be given contact information about all the franchisees of the last three years, and this will enable you to contact some of them and learn even more.
What Legal Information Should You Pay Attention to?
The FDD will contain a lot of legal information about the relationship between the franchisor and the franchisee.
You should pay close attention to this because it will govern everything you do as a franchisee.
It will specify the costs that you will have to pay to secure and continue to operate the franchise. This will include the initial cost, the royalties, money for advertising, and more. It will also indicate whether or not you have exclusive territory, and what conditions will break the agreement. When the conditions for breaking an agreement have been met, you need to find out if there is a time period allowed in which you can correct the issues. If not, you could suddenly be without your franchise for very small infractions.
How Can You Be Sure of What the FDD Contains?
It is a very good idea to submit your papers to an attorney who specializes in franchise law. This will enable you to know exactly what is in the FDD, and whether or not the attorney thinks it is a good opportunity – or not.