Thinking about expanding through franchising? Then, one of the first things you will need to do is have a franchise disclosure document (FDD) prepared. Second, you will have to register that FDD in the states that require registration, and then, as a franchisor, you will issue that FDD to prospective franchisees.
The benefit to franchisees is that the FDD provides them with information that the Federal Trade Commission and certain state regulators believe will help them make an informed decision about whether or not to go through with the acquisition.
So, what’s in an 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. They are outlined below. Read them all:
- Item 1 contains background information on the franchisor, its parents, predecessors, and affiliates.
- Item 2 describes the business experience for the last five years of individuals connected to the franchise, including, the directors and principal officers.
- Item 3 will disclose lawsuits involving the franchisor, its parents, predecessors and affiliates and relevant lawsuits involving any individual mentioned in Item 2.
- Item 4 must include the bankruptcy history of the franchisor, its parent, predecessors, affiliates and any officer or partner of the franchisor
- Item 5 describes the fees and payments the franchisee will have to pay for services or goods received from the franchisor before the franchisee’s business opens, including the initial franchise fee.
- Item 6 identifies recurring or occasional fees associated with operating the franchised business.
- Item 7 describes the franchisee’s estimated initial investment to begin operating the franchised business, including, rent, inventory, and equipment.
- Item 8 discusses which sources for goods and services that the franchisee must use and the amount of revenue that the franchisor may receive from the mandated suppliers.
- Item 9 identifies the franchisee’s principal obligations under the franchise agreement.
- Item 10 indicates whether the franchisor provides financing and if so, describes the material terms and conditions of those financing arrangements.
- Item 11 is the where the franchisor specifies its obligations to the franchisee. This section outlines the franchisor’s obligations to provide support both before and after the franchisee commences operations.
- Item 12 describes the territory protections, if any, that will be provided to the franchisee.
- Item 13 lists the franchisor’s trademarks.
- Item 14 describes the franchisor’s patents if any, and copyrights.
- Item 15 explains whether or not the franchisee is required to participate in the day-to-day operations of the franchised business.
- Item 16 describes any restrictions relating to the goods and services that the franchisee may sell.
- Item 17 is a chart identifying common provisions of the franchise agreement relating to the franchisor-franchisee relationship.
- Item 18 indicates whether any public figure is associated with the franchise system.
- Item 19 is the only optional provision. In Item 19, the franchisor may provide information about the historical or projected financial performance of the franchisor, its affiliates, its franchisees, its company-owned units, or some combination of the above.
- Item 20 contains charts that show the number of franchised units and company-owned units in existence for the prior three years.
- Item 21 contains the franchisor’s financial statements, including its balance sheet, income statement and cash flow statement.
- Item 22 identifies the proposed agreements relating to the sale of a franchise which will be attached to the FDD as exhibits. In addition to the franchise agreement, these may include a territory attachment, a non-a disclosure, and non-competition agreement, a lease rider, a personal guaranty, a release and the addenda required by certain states.
- Item 23 is a receipt for the FDD that the franchisor will ask prospective franchisees to sign upon receiving the FDD.
If this sounds like a lot of information and a lot of paper to review, it is. Whether you are a franchisor requiring the preparation of an FDD or a franchisee in need of an attorney to review an FDD, retain experienced franchise counsel to guide you. This is not an undertaking for do-it-yourselfers. In the meantime, got questions? Feel free to email them to me, Julie Lusthaus at [email protected] and let’s talk.