In non-registration states, if a franchisor does not routinely provide the FDD to prospective buyers of existing franchises businesses, it runs the risk that any of its actions relating to the buyer other than approving the sale could later be deemed as playing “some more significant role in the sale.”
Full Answer
What is the Franchise Disclosure Document (FDD)?
The Franchise Disclosure Document, or FDD, is a legal document that the Federal Trade Commission (FTC) requires franchisors to provide to franchise candidates, at least 14 days before a sale. An FDD is intended to give candidates the information they need to make a wise decision on whether or not to buy a particular franchise.
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.
Can franchise candidates request an FDD earlier in the process?
However, under the amended Rule, franchise candidates can request an FDD earlier in the process "upon reasonable request." This is usually interpreted to mean after the franchisor has given a positive response to a candidate's initial application and the sales process is under way. Franchisors cannot charge any fee for earlier delivery.
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 does FDD stand for franchise?
Franchise Disclosure DocumentThe 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.
Is the franchise agreement in the FDD?
The Franchise Disclosure Document (FDD) is a pre-sales disclosure document that provides franchise buyers with information about the franchisor, franchise fees, and opportunity. The Franchise Agreement is the legal agreement that creates a franchise relationship.
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.
When should a potential franchise receive the FDD?
14 daysAccording 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 agreed to consider it.
What is required in an FDD?
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 states require FDD?
States That Require FDD Registration or FilingCalifornia.Hawaii.Illinois.Indiana.Maryland.Michigan.Minnesota.New York.More items...
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.
Can you negotiate FDD?
According to one well-respected franchise attorney, "Between the FDD and the franchisee, there is a franchise agreement, and everything there is on the table." This statement appears to have both a literal and figurative meaning, but the gist of it is this — unless you're requesting something truly outrageous, you have ...
How long is an FDD valid?
Under the federal franchise laws, at the national level, a franchisor's FDD will automatically expire and require renewal within 120 days of the franchisor's fiscal year end. If your fiscal year is the same as a calendar year this means that your FDD will expire and require renewal on April 30th of each year.
How many days will the franchisor allows you to read the FDD?
Franchisors must provide all their prospective franchisee with a Franchise Disclosure before they finalize the sale. Legally, they have 14 days to provide potential franchisees with the franchise disclosure documents due to the Federal Franchise Rule.
How many items are in FDD?
Generally, FDDs contain information about the franchisor, the franchise system and the investment that the franchisee will be required to make. In all, there are 23 specific items each FDD includes.
What is Article 21 of the FDD?
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.
How many items are in the FDD?
Generally, FDDs contain information about the franchisor, the franchise system and the investment that the franchisee will be required to make. In all, there are 23 specific items each FDD includes.
Is the licensing company in the franchise agreement?
Licensing is governed by a licensing agreement, which involves a one-time transfer of property or rights for a fee. The licensor provides no technical support or assistance in most cases. Franchising is governed by an elaborate agreement specifying the responsibilities and duties of both the parties involved.
Is a franchise agreement a legal document?
The franchise agreement is a legally binding contract. It sets out the rules of the franchising relationship that both the franchisor and franchisee have agreed to.
When do you get an FDD?
Under the amended Rule, franchisors must provide an FDD to candidates "at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale." The clock starts ticking the day after delivery of the document, which can be delivered in printed or electronic form.
When did the FDD become mandatory?
The FDD (previously called the Uniform Franchise Offering Circular, or UFOC) became mandatory July 1 , 2008, as part of the FTC's amendment of its 1978 Franchise Rule. The original Franchise Rule was instituted to protect franchise candidates from disreputable franchisors, especially concerning claims about how much money a franchisee could earn.
What information does the amended franchise rule require?
According to the FTC, "the amended Rule requires franchisors to give prospective franchisees material information, including background information on the franchisor, the costs of entering into the business, the legal obligations of the franchisor and the franchisee, statistics on franchised and company-owned outlets, and audited financial information. In addition, if franchisors elect to make any financial performance representations, the amended Franchise Rule requires certain disclosures and substantiation for those representations." (A sample Table of Contents, listing all the items required in an FDD, is included at the end of this article.)
What does FDD stand for?
While FDD stands for Franchise Disclosure Document, it could equally stand for "Franchisee Due Diligence.". Because that's what the FDD is all about: it's part of the due diligence process each candidate must undertake -- thoroughly --- before signing a franchise agreement. The purpose of the disclosure document is to provide candidates ...
What is a franchise disclosure document?
The Franchise Disclosure Document, or FDD, is a legal document that the Federal Trade Commission (FTC) requires franchisors to provide to franchise candidates, at least 14 days before a sale. An FDD is intended to give candidates the information they need to make a wise decision on whether or not to buy a particular franchise.
How many pages are in a FDD?
The FDD is a long, complex legal and financial document that usually runs between 100 and 200 pages. Since it's written by franchise attorneys working to protect the interests of the franchisor, find yourself an attorney to review it -- and not just any attorney. Find a reputable franchise attorney.
What is the FTC?
The FTC provides additional advice and information, including an explanation of each of the parts of the FDD. The FTC also publishes a Compliance Guide for franchisors, listing in even greater detail all the information they must provide in an FDD.
What is a Franchise Disclosure Document?
An FDD is a legal document that franchisors must present to franchisees before they complete their purchase. This document outlines 23 items that must be disclosed to franchisees including fees, the legal relationship, and the history of the company.
What is item 1 of the Franchise?
Item 1: The Franchisor and Any Parents, Predecessors, and Affiliates: A description of the company and its history.
What is the 9th item in a franchise agreement?
Item 9: Franchisee’s Obligations: The franchisor must disclose the franchisee’s obligations under the franchise agreement. This is presented as a reference table and includes a summary of all legal obligations to include (but not limited to) site selection, opening obligations, and any obligations upon termination of the franchise agreement.
How long do you have to review FDD?
To franchisees, fully utilize your 14-day window to examine the FDD and review it with an attorney if possible. If something seems unclear or potentially suspicious, ask for clarification — and don’t settle until your concerns have been dealt with. You are making a huge decision by purchasing into a Franchise and you want to make sure that your investment will pay off.
How often do you need to update FDD?
An FDD must be updated at the very least, annually, within 120 days of the franchisor’s fiscal year-end. If changes occur throughout the year that impact the FDD, it must be updated on a quarterly basis as soon as that information changes. This prevents misleading information from being disseminated to potential Franchisees.
Why do franchisors need to ensure all ducks are in a row?
If you’re a franchisor, you’ll want to ensure that all of your legal ducks are in a row so you can present your best self to new franchisees.
Is it good to buy a franchise?
Purchasing a franchise is an excellent way to become a business owner while buying into an established brand. You’ll receive business guidance, marketing assets, training, and much more. However, while this is a great opportunity for you as an entrepreneur, you’ll want to make sure that you are making a sound business decision and are protected throughout the process.
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 long do you have to sign a FDD before you can buy a franchise?
FDD’s are legal documents that are required to be provided to prospective franchise buyers in the United States at least 14 days before they pay a franchisor or sign an agreement. For more information on FDD’s check out Franchise Basics: What is a Franchise Disclosure Document? in which we cover the document in depth.
What states have FDD’s publicly available for download?
California Free FDD Search - California Department of Financial Protection & Innovation Self Service Portal. Search for publicly available franchise documents submitted to the State of California by typing in the name of the franchise in the ‘Legal Name’ box and selecting “Uniform Franchise Registration” in the ‘Application Type’ box.
How to search for a franchise in Wisconsin?
Search for publicly available franchise registrations submitted to the State of Wisconsin by typing in the name of the franchisor under ‘Name (Legal or Trade’ and click search.
How to find franchise registrations in Indiana?
Search for publicly available franchise registrations submitted to the state of Indiana by selecting “franchise” under ‘Registration Type’ and typing in the name of the franchisor under ‘name’.
What is a FDD?
If you are looking into franchise opportunities or thinking about franchising your business, Franchise Disclosure Documents (FDD’s) are one of the best sources of information on franchisors and their franchise offerings.
Do franchises need to register in Wisconsin?
Luckily, Franchisors are required to register their franchise offerings in various States and four of them provide the disclosure documents online for free, Wisconsin is our favorite since we think it is the easiest to use.
