Posted on Jul 01, 2015
Franchise Disclosure Documents
The Franchise Disclosure Document(FDD) and its older counterpart the Uniform Franchise Offering Circular (UFOC) is a document describing the relationship between franchisor and franchisee which sets forth particular terms and conditions for the relationship. As of 2007 the Federal Trade Commission changed their regulations so that franchises would have to update their paperwork from UFOCs (old version) to FDDs (new version). Overall the document contains detailed information about the franchisor and the franchise organization structure as a whole.
The first several sections of the document contain information about the franchisor’s history - how long they’ve been in business, any predecessors or affiliates, key individuals in the organization, litigation history, bankruptcy history etc. These sections are very important to look into so you have an idea about the background of a franchisor you’re interested in. Mostly you should be on the lookout for potential red flags about the franchisor - do they have a history of litigation or bankruptcy? If they do you definitely need to do additional research about the franchise.
The next several sections describe the relationship between franchisor and franchisee. These sections cover everything from territory agreements, to initial fees, to patents, to the renewal or termination of franchising agreements. If you are seriously considering opening a franchise you should pay extremely close attention to these sections. You need to know how your relationship with the franchisor operates. A good franchisor/franchisee relationship can make for an amazing and beneficial relationship between both parties. But, a bad relationship can lead to disputes and disagreements and make opening a franchise a poor decision. By understanding the arrangements laid out in the FDD you can know what to expect and how you will work with your franchisor.
The last chunk of the FDD has to do primarily with financial information. As we discussed in a previous blog post these sections can be used to give you a good idea as to how much it costs to open and run a franchise and can give you a rough estimate of how much money you can make when you open a franchise. The information in this section is given as averages or ranges and does not give you a precise picture of how your franchise will necessarily perform. But it does give you a good starting point to get an idea as to what you need to open a franchise.
Overall the FDD is just one piece of the puzzle when it comes to deciding whether you should open a franchise, but it is a useful tool for you to use.
Interested in opening a franchise but don’t know where to start? Take our free franchise matching quiz and find the perfect franchise for you
NEXT POST: Franchises for the Summer