Prospective franchisees typically receive a Franchise Disclosure Document after requesting more information about a franchise or during the Discovery Day process. But this 100- to 200-page legal document is more than just an intimidating pile of papers; it can mean the difference between your success or failure as a franchise business owner.
A Franchise Disclosure Document, also known as an FDD, provides prospective franchisees vetted and validated information to make an educated buying decision. This protects the candidate from being duped and the franchisor against potential allegations of misleading claims.
The FDD is broken down into 23 sections, or items, and covers everything from franchisor history and required fees to rules and restrictions. We broke each item of the FDD into chunks (organized by subject and relevance). For those of you who like things in numerical order, just scroll down to find a chronological list describing each item.
Let’s Break It Down by Subject
First, we’re going to highlight the most immediate questions prospective candidates ask when choosing a franchise opportunity: (1) how much do I need to invest? (2) how much can I potentially make?
- Item 5: Discloses initial costs associated with becoming a franchisee, including the franchise fee, multi-unit fees and more
- Item 6: Describes any ongoing or recurring fees like royalties, advertising fees, etc.
- Item 7: Outlines the total initial investment, including start-up costs and the fees disclosed in Item 5
- Item 10: Provides information about the franchisor’s available financing options
- Item 19: (Not required) if listed, provides information about a unit’s average financial performance
- Item 21: Discloses audited financial statements of the past three years
By now, you probably know the best part about franchising is being able to leverage a franchisor’s brand recognition and operational systems, including training and support. This next grouping covers exactly what kind of support is available after signing on as a franchisee.
- Item 8: Outlines supply sources and discloses any restrictions regarding the source of products/services
- Item 11: Provides details about any ongoing support, including training, operations, technology
- Item 12: Describes and defines market territories and protections that come with exclusive territories
- Item 13: Outlines the franchisor’s trademarks, service names or trade names
- Item 14: Provides a list of patents, copyrights or any proprietary information
- Item 16: Describes any restrictions on the goods or services a franchisee can offer customers
- Item 17: Covers the process of renewing the franchise fee, transfer options, grounds for termination, as well as outlines the rights and restrictions during a disagreement between franchisee and franchisor
- Item 18: Details if the franchisor partners with public figures like celebrities to advertise products/services; reveals how much the public figure is paid
This group of items describes the franchisor’s history in detail. And it’s more than just a general overview; this is where potential red flags like bankruptcies or litigation cases are explained.
- Item 1: Gives an overview of the franchisor history, including its parent company, predecessors and affiliates
- Item 2: Describes the executive team and board of directors’ professional experience
- Item 3: Provides a list of past and current criminal or civil litigation cases
- Item 4: Recognizes if the franchisor or founder has ever faced bankruptcies
- Item 20: Lists the locations and contact information of past and current franchisees
The last two items cover franchisee obligations.
- Item 9: Provides a reference table indicating where to find obligatory duties in the franchise agreement
- Item 15: Discloses expectations regarding participation and operation of the business
- Item 22: Lists any and all documents the franchisee is required to sign
- Item 23: A receipt signed by the prospective franchisee that confirms they received the FDD
Now Let’s Do It Item-By-Item
Item 1: Gives an overview of the franchisor history, including its parent company, predecessors and affiliates
Item 2: Describes the executive team and board of directors’ professional experience
Item 3: Provides a list of past and current criminal or civil litigation cases
Item 4: Recognizes if the franchisor or founder has ever faced bankruptcies
Item 5: Discloses initial costs associated with becoming a franchisee, including the franchise fee, multi-unit fees and more
Item 6: Describes any ongoing or recurring fees like royalties, advertising fees, etc.
Item 7: Outlines the total initial investment, including start-up costs and the fees disclosed in Item 5
Item 8: Outlines supply sources and discloses any restrictions regarding the source of products/services
Item 9: Provides a reference table indicating where to find obligatory duties in the franchise agreement
Item 10: Provides information about the franchisor’s available financing options
Item 11: Provides details about any ongoing support, including training, operations, technology
Item 12: Describes and defines market territories and protections that come with exclusive territories
Item 13: Outlines the franchisor’s trademarks, service names or trade names
Item 14: Provides a list of patents, copyrights or any proprietary information
Item 15: Discloses expectations regarding participation and operation of the business
Item 16: Describes any restrictions on the goods or services a franchisee can offer customers
Item 17: Covers the process of renewing the franchise fee, transfer options, grounds for termination, as well as outlines the rights and restrictions during a disagreement between franchisee and franchisor
Item 18: Details if the franchisor partners with public figures like celebrities to advertise products/services; reveals how much the public figure is paid
Item 19: (Not required) if listed, provides information about a unit’s average financial performance
Item 20: Lists the locations and contact information of past and current franchisees
Item 21: Discloses audited financial statements of the past three years
Item 22: Lists any and all documents the franchisee is required to sign
Item 23: A receipt signed by the prospective franchisee that confirms they received the FDD
What’s All the Fuss About?
In 1978, the Federal Trade Commission (FTC) noticed an influx of franchise-related scams. Their response was to mandate the FTC Rule, requiring franchisors to provide franchise buyers with a legal document that discloses pertinent information to the pre-sale process at least 14 days prior to signing a franchise agreement.
The moral of the story is that choosing a franchise opportunity is a serious commitment. Do your due diligence by giving the FDD a thorough read with an experienced franchise consultant or attorney.
