What is the Franchise Disclosure Document (FDD)?
What is the Franchise Disclosure Document? The Franchise Disclosure Document, also referred to as an "FDD," is a legal document and prospectus that the FTC requires franchisors to disclose to prospective franchise buyers 14 days before selling a franchise or receiving any fees.
What does item 20 of the FDD mean for a franchisee?
Item 20 of the FDD, is often overlooked by potential franchise buyers but provides a lot of clues as to how well the franchise company is doing. This section provides data on the number of outlets (also referred to as units, locations, or territories) in operation at the start and end of a given year.
What are the contents of the FDD?
The contents of the FDD are regulated by federal and state franchise laws and within every FDD are 23 disclosure items that include information about the franchisor, the franchisor's management team, estimated start-up expenses, legal obligations, and other information about the franchise opportunity.
When do franchisors have to provide financial disclosure to franchisees?
According to the FTC, franchisors have an obligation to provide the franchisee with the financial disclosure document at least 14 days before it needs to be signed or before any initial money is exchanged.
Is an FDD required?
The Franchise Disclosure Document (FDD) is a legal document that the Federal Trade Commission (FTC) requires franchisors to provide to prospective franchisees before selling a franchise.
Why is a Franchise Disclosure Document FDD necessary?
The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision.
What states require FDD?
States That Require FDD Registration or FilingCalifornia.Hawaii.Illinois.Indiana.Maryland.Michigan.Minnesota.New York.More items...
What are the legal requirements of a franchised operation?
Required Documents to Be Submitted to the FranchisorLetter of Intent to Franchise. A Letter of Intent is used in most business transactions like franchising. ... Application Form. ... Site Location Proposal. ... Business Name Registration (Department of Trade and Industry) ... Barangay Clearance. ... Business or Mayor's Permit.
Who must be disclosed with the FDD?
franchisorUnder Item 3 of the Franchise Disclosure Document (FDD), a franchisor is required to disclose certain current and past lawsuits, or “actions,” that the franchisor or its predecessors, affiliates, parents, or individuals disclosed in Item 2 were involved in or subject to.
When should a potential franchisee receive the FDD?
When should a Franchisee receive a Franchise Disclosure Document? The Federal Franchise Rule states that the FDD must be disclosed to a potential franchisee no less than 14 days prior to them signing a franchise agreement or paying any money to the franchisor.
Does a franchisor have to file an FDD?
State Specific Franchise Laws for Franchisors Franchisors must develop, maintain, register, and disclose a uniform Franchise Disclosure Document (FDD). The FDD must be registered in the franchise registration states, filed in the franchise filing states, and disclosed in every state to prospective franchisees.
How many states have franchise relationship laws?
The Federal Franchise Rule is the overarching federal law that governs the offer and sale of franchises throughout the United States, in all fifty states. The Federal Franchise Rule is issued by the Federal Trade Commission and may be found here.
Are franchise agreements recorded?
Given the highly interdependent nature of the license agreement, related use of intellectual property and other factors, many companies are recording all franchise fee revenues over the expected life of the franchise agreement.
What are the two main franchising legal documents?
There are two legally required documents you should become very familiar with before franchising your business: the Franchise Disclosure Document, and the Franchise Agreement.
What are the key documents required of franchising?
6 Legal Documents You Need To ConsiderProspectus. This is often the first document a prospective franchisee will come across. ... Confidentiality agreement or intent to proceed/ deposit agreement. ... Information memorandum /disclosure document. ... Franchise agreement. ... Trademark licence. ... Operations manual.
What documents are needed for a franchise?
The primary franchising documents needed to create a franchise relationship and franchise your business include: Franchise disclosure document. Franchise agreement....Franchise Disclosure Document. ... Franchise Agreement. ... Operations Manual. ... Franchise Registration Applications and Notices. ... Financial Statements.
What is the FDD disclosure rule?
14-Day Disclosure Period – Under the FTC's Federal Franchise Rule, you must disclose your FDD to a prospective franchisee no less than 14 calendar days prior to the franchisee signing any agreement with you or your affiliate or paying any fee to you or your affiliate.
Why is it important to review FDD before signing FA?
If you're buying a franchise reviewing the FDD is a critical step in the due diligence process. The FDD is a legal disclosure document that a franchisor must provide to you not less than 14 days before you sign a franchise agreement or pay any money to the franchisor.
Why franchisors must disclose and include in their FDD audited multi year financial statements?
Item 21 of the Franchise Disclosure Document (FDD) requires franchisors to disclose certain financial statements that reflect their financial condition. This requirement further assists prospective franchisees in the investment-decision-making process.
What is a franchise disclosure agreement Why is it important for both the franchisor and the franchisee?
The purpose of the Franchise Disclosure Document (FDD) is to describe the relationship between the franchisor and franchisee, provide the franchisee with the information they need to begin to understand the franchisor and its offering and be used by the prospective franchisee as a basis for then conducting due ...
What is FDD in franchise?
The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:
What Is a Franchise Disclosure Document (FDD)?
The franchise disclosure document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. The document contains information essential to potential franchisees about to make a significant investment.
What does a franchisor do?
The franchisor may help the franchisee with finding a location, training, and advice on management, marketing, or personnel. The relationship does not necessarily end after the initial start-up, either. The franchisor may also provide support through newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars. Because franchises can be so varied in their approach, the role of the FDD is to explicitly lay out what will and will not be provided to the franchisee and how the relationship will work going forward.
What is the FDD?
The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below: The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating.
How many sections are there in the FDD?
The FDD is divided up into 23 sections and the potential franchisee must review each of them before signing. According to the FTC, franchisors have an obligation to provide the franchisee with the FDD at least 14 days before it needs to be signed or before any initial money is exchanged.
What is franchise litigation?
Litigation: Covers pending actions, material actions, and prior actions against the franchise. Bankruptcy: Bankruptcies involving the franchise, its predecessors, and its affiliates must be disclosed. Initial fees: A franchisor must disclose any fees charged to franchisees.
How many years of financial statements are required for a franchise?
Financial statements: A franchisor must provide three years of financial statements to the franchisee as part of the FDD. This includes balance sheets, statements of operations, owner’s equity, and cash flows.
What is a franchise disclosure document?
Writing, updating, and distributing the franchise disclosure document, or FDD , is a key part of growing your business with new franchise locations. This important legal document is chock full of information that your franchise partners need to know before they invest in your brand. The experts at Accurate Franchising, Inc. can help you compile the data into your FDD so that it covers every required point and shows your prospects why yours is a great brand.
What is accurate franchising?
Accurate Franchising consultants provide strategic planning, sales support/training, marketing, operations, legal, financing and real estate assistance – all designed to help business owners grow. To provide the personalized and time-intensive consultation required, Accurate Franchising currently limits the program to five clients at a time.
What is FDD in franchising?
An FDD is usually received from the franchisor in the disclosure process, which is when the candidate is collecting information directly from the franchisor about the franchise opportunity. The franchisor generally makes the candidate sign a receipt (these days, this is done electronically) to prove that the FDD was provided.
What is an FDD?
An FDD can be a huge, sometimes overwhelming document, but one that contains necessary and valuable information. While you should carefully review every item in the FDD, there are certain items that you should pay close attention to.
How many items are in a franchise disclosure document?
This document, now known as the Franchise Disclosure Document (FDD) must contain 23 standard items, plus the franchise agreement, which is what the candidate will eventually sign if both sides are in agreement. An FDD can be a huge, sometimes overwhelming document, but one that contains necessary and valuable information.
What is FDD item 20?
Item 20 of the FDD, is often overlooked by potential franchise buyers but provides a lot of clues as to how well the franchise company is doing. This section provides data on the number of outlets (also referred to as units, locations, or territories) in operation at the start and end of a given year. It will distinguish between franchise units and corporate-owned units. Typically, Item 20 will show data from each of the previous three years. As with other data, you’re looking for sustained growth as a sign of a healthy system. That said, it is important to remember that some closures and turnover, especially in large systems, is natural.
What does it mean when a franchisor has no other pursuits?
You will also find any other line of business the franchisor has franchised in or pursued. It’s generally a good sign when there are no other pursuits listed, as it indicates a dedication to the current brand you are investigating.
How many items are in a FDD?
The content within an FDD varies from company to company, but the structure is always consistent. The 23 Items of the FDD can be categorized into 5 main groups:
How many years of financial statements do franchise companies provide?
Most franchise companies will provide two or three years’ worth of financial statements. These statements include:
How many items are required in a franchise?
§436, a franchisor selling a franchise must include all twenty-three Items in its FDD. The purpose of this requirement was to supplant the old timey sale-practices of franchisors, who could play fast and loose with the truth to the detriment of vulnerable prospective franchisees. While the contents of each Item vary with each franchisor, each FDD is required to contain the following Items in this order:
What is a franchise disclosure document?
The Franchise Disclosure Document (FDD) is a legal document that the Federal Trade Commission (FTC) requires franchisors to provide to prospective franchisees before selling a franchise. The FDD is divided into twenty-three sections or “Items”, each of which require a franchisor to disclose certain information to assist prospective franchisees in making a well-informed decision before investing in the franchise. This information concerns the franchisor, the individuals and entities associated with the franchisor, the franchise opportunity, the fees charged by the franchisor, the franchisor-franchisee relationship, and other information about the offering. This document can be overwhelming to prepare on your own, so it is important to have a skilled franchise attorney by your side to help you with this process.
How Does a Lawyer Help with Drafting a Franchise Disclosure Document?
Franchise lawyers are vital to ensuring compliance with two main principles that apply in the drafting of a F DD. The first principle is that the FDD must be drafted in plain English. While this does not prohibit the use of artful language in making the necessary disclosures, there is a fine line between artfully drafted and overly descriptive FDDs. Our team is well informed of where certain language should and should not be used, and could save a franchisor the time, expense, and headaches associated with an improperly drafted disclosure document.
What is the second principle of FDD?
The second principle is that an FDD should disclose only the information required under each of the twenty-three items —nothing more. Innocent candor resulting in over-disclosure of information can sometimes hinder the FDD registration process and ultimately hurt the franchisor.
How long does a franchise need to provide a FDD?
Every franchisor is required by law to provide an FDD to a prospective franchisee at least 14 days before the signing of a franchise agreement.
How long is a franchise FDD?
Even still, understanding an FDD can be a tricky process. They tend to be over 100 pages long and finding the exact information you need to understand can be frustrating.
What is item 9 in FDD?
Item 9 almost acts as a table of contents for the FDD from the franchisees perspective. It lays out a list of necessary obligations for the franchisee and where in the FDD the franchisee can find this information.
How much does it cost to franchise a franchise?
Although the Sbarro initial fee can be around $20,000 the total initial investment for a new franchisee can range from $350,000 to over $700,000. A major factor to consider here is what real estate purchases will need to be made or what property improvements you will have to make. Those costs can add up very quickly.
What is item 2 in franchise?
Item 2 is fairly straightforward. It lists the business experience of key figures in the franchise organization including their directors.
How to tell if a franchise is healthy?
The best indicator of the health of a franchise might be the unit growth of its franchise locations. Item 20 gives you a breakdown of how the number of franchise units, and in some cases corporate owned locations, have changed year over year. Generally you want to see the number going up, and if it's not you would want to understand why. In Sbarro's case 2014 saw a major decrease in the number of corporate owned locations operating. That might seem like a major red flag at first to perspective franchisees, but after doing some research we can find that this is part of their plan to recover from their 2011 bankruptcy that was mentioned in Item 4. You want to not only understand which direction the franchise is trending, but understand why as well.
What is the second section of the FDD?
The second major section of the FDD gets more into the details of individual unit operation. It breaks down the typical franchise costs ranging from franchise fees, to ongoing costs, to estimated initial investment. When trying to construct a business model around your franchise these sections are crucial as they will allow you to understand the total costs associated with becoming a franchise owner.
What Is a Franchise Disclosure Document (FD?
- The franchise disclosure document (FDD) is a legal disclosure document that must be given to i…
The FDD was previously known as the Uniform Franchise Offering Circular (UFOC) before it was revised by the Federal Trade Commission (FTC), the country's consumer protection agency, in July 2007. Franchisors had until July 2008 in order to comply with the revisions. The FDD has also be… - The franchise disclosure document (FDD) provides a clear picture of how the business relations…
Franchises can be very different in the support they offer in return for licensing fees.
Understanding a Franchise Disclosure Document (FD
- The FDD outlines comprehensive information about the roles of both parties involved in the fran…
A franchise is a license that a party (the franchisee) acquires to allow them to have access to a business's (the franchisor) proprietary knowledge, processes, and trademarks. This gives the franchisee the ability to sell a product or provide a service under the business's name. In exchan…
Requirements for a Franchise Disclosure Document (FD
- The FDD is divided up into 23 sections and the potential franchisee must review each of them be…
According to the FTC, franchisors have an obligation to provide the franchisee with the FDD at least 14 days before it needs to be signed or before any initial money is exchanged. The franchisee has a right to a copy of the FDD after the franchisor has received the application and …
Sections of the Franchise Disclosure Document (FD
- The FDD contains information essential to potential franchisees about to make a significant inve…
The franchisor and any parents, predecessors, and affiliates: This section establishes how long the franchisor has been operating. - Business experience: Outlines the experience of the executive team running the franchise system.
Litigation: Covers pending actions, material actions, and prior actions against the franchise.