A franchise disclosure document (FDD) is a legal document that discloses information about a franchisor and the franchise opportunity. The FDD is also sometimes referred to as a Uniform Franchise Offering Circular (UFOC).
The FDD contains important information about the franchisor, the franchise opportunity, and the terms of the franchise agreement. It is important for prospective franchisees to carefully review the FDD before making any decisions about whether or not to purchase a franchise.
In the U.S.A., the FDD must be delivered to a prospective franchisee at least 14 days before the franchisee signs any contract or pays any money to the franchisor. In Canada, there is no such requirement, but most franchisors will voluntarily provide an FDD to prospective franchisees.
What Information is Contained in a Franchise Disclosure Document?
The FDD contains 23 items of disclosure, which are organized into seven sections. The sections are:
Item 1: The Franchisor, Its Predecessors, and Affiliates
Item 1 of the FDD discloses information about the franchisor, its predecessors, and its affiliates. This information includes the Franchisor’s legal name and any trade or assumed names used by the franchisor; the Franchisor’s address, telephone number, and website address; the legal structure of the franchisor (e.g., corporation, partnership, etc.); the Franchisor’s year of incorporation; the names of the franchisor’s principals; and a description of the business experience of the franchisor’s principals.
Item 2: Franchisor’s Business Experience
Franchisor’s Business Experience discloses information about the franchisor’s business experience. This information includes a list of the franchisor’s current and former franchises, a list of the franchisor’s current and former licensed locations, and a list of the franchisor’s current and former company-owned locations. The Franchisor must also disclose whether it or any of its affiliates have ever been convicted of a felony or misdemeanor.
Item 3: Litigation
Litigation discloses information about any pending or, within the past 10 years, resolved lawsuits to which the franchisor or any of its affiliates were a party. The Franchisor must also disclose whether any of its officers, directors, or principals have ever been subject to any orders or judgments entered by a court in connection with a franchise-related dispute.
Item 4: Bankruptcy
Bankruptcy discloses information about any bankruptcies filed by the franchisor or any of its affiliates within the past 20 years. The Franchisor must also disclose whether any of its officers, directors, or principals have ever been subject to any bankruptcy proceedings.
Item 5: Initial Franchise Fee
Initial Franchise Fee discloses the amount of money that a prospective franchisee will be required to pay for the right to open and operate a franchised business. The Franchisor must also disclose whether it offers any financing arrangements for the initial franchise fee.
Item 6: Other Fees
Other Fees discloses information about all of the other fees that a prospective franchisee will be required to pay, including ongoing royalties, advertising fees, and training fees. The Franchisor must also disclose whether it offers any financing arrangements for these fees.
Item 7: Initial Investment
Initial Investment discloses the estimated amount of money that a prospective franchisee will need to spend in order to open and operate a franchised business. The Franchisor must also disclose whether it offers any financing arrangements for the initial investment.
Item 8: Restrictions on Sources of Products and Services
Restrictions on Sources of Products and Services discloses any restrictions that the Franchisor places on the sources of products and services that a franchised business may purchase.
Item 9: Franchisee’s Obligations
Franchisee’s Obligations discloses information about the obligations that a franchisee will be required to fulfill under the terms of the franchise agreement. These obligations include, but are not limited to, the following:
Item 10: Financing
Financing discloses information about the Franchisor’s financing arrangements for the initial franchise fee and other fees. The Franchisor must also disclose whether it offers any financing arrangements for the initial investment.
Item 11: Franchisor’s Assistance
Franchisor’s Assistance discloses information about the training and assistance that the Franchisor will provide to a franchisee. The Franchisor must also disclose whether it requires a franchisee to attend any training programs.
Item 12: Territory
Territory discloses information about the territory in which a franchised business will be located. The Franchisor must also disclose whether it imposes any restrictions on the franchisee’s ability to sell products or services outside of the franchised territory.
Item 13: Trademarks
Trademarks discloses information about the trademarks that the Franchisor has registered in connection with its franchise system. The Franchisor must also disclose whether it requires a franchisee to use only certain specified trademarks in connection with the operation of its franchised business.
Item 14: Patents, Copyrights, and Proprietary Information
Patents, Copyrights, and Proprietary Information discloses information about any patents, copyrights, or other proprietary rights that the Franchisor has in connection with its franchise system. The Franchisor must also disclose whether it requires a franchisee to use only certain specified patents, copyrights, or other proprietary rights in connection with the operation of its franchised business.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Obligation to Participate in the Actual Operation of the Franchise Business discloses information about the Franchisor’s requirements regarding a franchisee’s participation in the actual operation of its franchised business. The Franchisor must also disclose whether it permits a franchisee to hire someone else to participate in the actual operation of its franchised business.
Item 16: Restrictions on What the Franchisee May Sell
Restrictions on What the Franchisee May Sell discloses any restrictions that the Franchisor places on the types of products or services that a franchised business may sell.
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
Renewal, Termination, Transfer, and Dispute Resolution discloses information about the Franchisor’s policies regarding the renewal, termination, transfer, and dispute resolution of its franchise agreements. The Franchisor must also disclose whether it has ever terminated or refused to renew a franchise agreement.
Item 18: Public Figures
Public Figures discloses information about any public figures that are associated with the Franchisor or its franchise system. The Franchisor must also disclose whether it has ever received any negative publicity.
Item 19: Financial Performance Representations
Financial Performance Representations discloses any financial performance representations that the Franchisor makes to potential franchisees. The Franchisor must also disclose whether it has made any such representations in the past.
Item 20: Outlets and Franchisee Information
Outlets and Franchisee Information discloses the number of outlets that the Franchisor currently has operating under its franchise system, as well as the number of outlets that it has opened and closed in the past. The Franchisor must also disclose information about its current and former franchisees, including the names and contact information of some of its current and former franchisees.
Item 21: Franchisor’s Financial Statements
Franchisor’s Financial Statements discloses the Franchisor’s audited financial statements for the most recent fiscal year. The Franchisor must also disclose whether it has ever filed for bankruptcy.
Item 22: Contracts
Contracts discloses copies of all contracts and other agreements that a prospective franchisee will be required to sign if they decide to purchase a franchised business from the Franchisor. These contracts and agreements may include the Franchise Agreement, the Area of Development Agreement, the Trademark License Agreement, and the Supply Agreement.
Item 23: Receipt
The Receipt must be signed by the prospective franchisee and must state that the prospective franchisee has received a copy of the Franchisor’s FDD. The FDD must also be dated so that the prospective franchisee knows how old it is.
The FDD must also include two additional disclosures: a state-specific disclosure and an earnings claim disclosure. The state-specific disclosure contains information about any laws that may apply to the franchise relationship in the state where the franchisee will be operating. The earnings claim disclosure contains any information about the franchisor’s past performance that the franchisor wishes to disclose.
It is important to note that the FDD is not a contract. It is simply a document that contains information about the franchisor and the franchise opportunity. A prospective franchisee should not sign a franchise agreement until they have had a chance to review the FDD and consult with an attorney or other advisor.
How is a Franchise Disclosure Document Different From a Uniform Franchise Offering Circular?
A FDD is a legal document that discloses information about a franchisor and the franchise opportunity, while a UFOC is simply a document that contains information about the franchisor and the franchise opportunity. The FDD must be provided to a prospective franchisee at least 14 days before the franchise agreement is signed and must be in a format prescribed by law. The FDD contains 23 items of disclosure, which are organized into seven sections. The UFOC does not have to be provided to a prospective franchisee until after the franchise agreement is signed and does not have to be in a prescribed format. The UFOC contains 20 items of disclosure, which are organized into six sections.
What are the benefits of reviewing a franchise disclosure document?
The FDD contains important information about the franchisor, the franchise opportunity, and the terms of the franchise agreement. It is important for prospective franchisees to carefully review the FDD before making any decisions about whether or not to purchase a franchise. The FDD can help prospective franchisees understand the risks and rewards of purchasing a particular franchise. Additionally, the FDD can help prospective franchisees compare different franchises and make an informed decision about which franchise is right for them.
How can I get more information about franchise disclosure documents?
The FDD must be provided to a prospective franchisee at least 14 days before the franchise agreement is signed and must be in a format prescribed by law. The FDD contains 23 items of disclosure, which are organized into seven sections. More information about the FDD can be found in the Franchise Rule, which is promulgated by the Federal Trade Commission. Additionally, state laws may also govern the FDD and the franchisor-franchisee relationship. In general, prospective franchisees should consult with an attorney or other advisor to get more information about FDDs and their rights as a franchisee.