What do franchisors need to know about the FDD?
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. Contracts: This is where the franchisor outlines the franchise agreement.
What are FDD disclosures?
Item 1 FDD disclosures are designed to provide franchise buyers with information about the corporate structure of the franchisor, any affiliated companies, and any predecessors such as a former owner of the franchise system. Within FDD Item 2 franchisors must disclose information about the franchisor's management team.
What is the FDD (uniform franchise offering circular)?
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 is an FDD and why is it important?
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. 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.
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 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 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 item 16?
Item 16: Restrictions on What the Franchisee May Sell.
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.
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.
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.
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 is item 8?
Item 8: Restrictions on Sources of Products and Services. Item 8 provides information on what products and services a franchisee must purchase from approved suppliers. An “approved supplier” means any supplier that the franchisee is permitted to use. Most franchisors also have approved suppliers that the franchisees are required to use ...
What is item 5 in franchise?
Item 5 lists all fees that are paid to the franchisor or its affiliates before the franchised business is open. These generally include initial franchise fees, any territory fees, training fees, software fees and fees for inventory purchases. Item 5 only lists fees paid to the franchisor or its affiliates. Item 7 and Item 8 will list fees paid ...
What is FDD in franchising?
The FDD discloses information but does not create a legal obligation. The franchise agreement is a binding legal contract that is signed by both the franchisor and franchisee. It is an agreement to do something (open and operate a franchise) and creates legal obligations. The franchise agreement controls the relationship between ...
How many sections are there in the FDD?
It is divided into 23 sections called “Items” plus a list of exhibits. The law requires the franchisor to provide the FDD to you to help you better understand the franchise agreement and to learn important information about the franchisor and the franchise system. Important note: The FDD and the franchise agreement, ...
What is a franchise disclosure document?
The Franchise Disclosure Document (FDD) is a document that provides information about the franchisor, the franchise system, and the franchise agreement. The FDD’s primary purpose is to inform you, as a potential buyer, about the franchise, your investment, and the business you are purchasing. It is divided into 23 sections called “Items” ...
Why does the FDD matter?
It’s important that you fully understand what the franchise opportunity is and it’s also important for the franchisor gets to give you as much information about who they are as possible so you can see if you will be the right fit for the franchise system and vice versa.
What is in the FDD?
The FDD contains 23 items that are required by the FTC. Those items help a potential buyer understand the franchise offering and to compare multiple offerings. Here are the list of 23 items in every FDD:
