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Posted on Nov 25, 2012

What is the Franchise Disclosure Document (FDD)?

The Franchise Disclosure Document (FDD)

The Franchise Disclosure Document (FDD) was previously recognized as the Uniform Franchise Offering Circular (UFOC) and due to some revisions made by the Federal Trade Commission in the July of 2007, its name was changed and a legal document was created for the benefit of franchisees.

Franchisors, operating within 15 states, are required by law to submit a FDD to franchisees before they sign any agreement or any monetary exchange takes place. The Federal Trade Commission supervises these transactions and it lies within their jurisdiction to ensure that the franchisor in certain states provides the possible franchisee with certain information beforehand so as to ensure some manner of security to the franchisee. Due to some unethical behavior in the 1960s and 1970s, franchisors used their influential market position to hide certain information and franchisees unknowingly fell prey to these franchisors and went into harmful relations. To ensure that the franchisees knowingly enter into an agreement, the Federal Trade Commission made it mandatory for franchisors to submit a UFOC, later FDD, which is basically a document with certain information regarding the operations of the franchise.

States following the FDD
The Federal Trade Commission makes it necessary for franchisors all across the country to provide prospective franchisees with the FDD prior to any monetary exchange or signing of agreements. However in certain states it is also required by law that the franchisor must first be approved and registered by the state before it can be promoted to prospective franchise buyers.
These states include:

California Hawaii
Illinois Indiana
Maryland Michigan
Minnesota New York
North Dakota Oregon
Rhode Island South Dakota
Virginia Washington
Wisconsin  

States such as Minnesota and Illinois have further stringent requirements on the franchisor as they seek for more protection for prospective franchisees.

Items present in the FDD
The FDD contains extensive information about the franchisor and the franchise organization as well. The information contained within the document is meant to give the franchisee enough knowledge about the organization so that they may make an informed decision when choosing a franchise.

The document contains 23 items of information, all must be current as to the completion of the franchisor’s most recent fiscal year, which provide a general look of the organization in its entirety. The disclosure document must be provided to the prospective franchise should:
a)      The first personal meeting of the franchisor and prospective franchisee
b)      Ten working days prior to the execution of a contract or money payment to the franchisor, whichever of the two occurs first.

The Items enclosed within the FDD are:

  1. The Franchisor, It’s Predecessors And Affiliates
  2. Business Experience
  3. Litigation
  4. Bankruptcy
  5. Initial Franchise Fee
  6. Other Fees
  7. Initial Investment
  8. Restrictions On Sources Of Products And Services
  9. Franchisee’s Obligations
  10. Financing
  11. Franchisor’s Obligations
  12. Territory
  13. Trademarks
  14. Patents, Copyrights and Proprietary Information
  15. Obligation To Participate In The Actual Operation Of The Franchise Business
  16. Restrictions On What The Franchisee May Sell
  17. Renewal, Termination, Transfer And Dispute Resolution
  18. Public Figures
  19. Earnings Claims
  20. List Of Outlets
  21. Financial Statements
  22. Contracts
  23. Receipt

How to use the FDD
The FDD is very similar to a publicly traded company's annual report or securities prospectus. The information contained within it provides the prospective franchisee with the means to evaluate a company and to make an educated selection of a franchise opportunity based on their own financial situation, skillset, goals, and investment criteria. An accredited franchise company, whether publicly traded or privately owned, must provide the disclosure document to the prospective franchise owner prior to signing of the Franchise Agreement.

People who can best benefit from the FDD include: Potential franchisees, potential franchisors, current franchisors (for competitor analysis), investors, consultants, attorneys, financial companies, and suppliers of products and services to franchisors and franchisees.

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