The Importance of Franchise Disclosure Documents

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By Krasimir Hristov

Franchise disclosure documents (FDDs) are essential parts of the franchising process, and should be written using plain English without resorting to legalese.

Provide information about the background of the franchisor, including its parents, predecessors, and affiliates. Any disputes between current or previous franchisees must also be disclosed.

Information About the Franchisor

An FDD’s most vital function is providing information about its franchisor. This section of the document details their years in business, the members and positions held by their executive management team, any predecessor companies they may have had and their experience as well as any litigation against the franchiser that has taken place in relation to that entity.

The financial section of a franchise disclosure document (FDD) details an estimate of initial investments required to launch your business, including fees charged by franchisors. Additionally, this section details costs related to real estate purchases, inventory and equipment required for starting up and operating the franchise. Careful review is recommended in this area of the FDD to make sure you can afford initial investments and any associated operational costs.

Attention must be paid to Item 3, which reveals any lawsuits or claims filed against the franchisor and their executive team. This will provide valuable insights into their culture and can help determine if working together in future is viable. In addition, this section should contain any settlement agreements reached between franchisees in recent years and franchisors.

Items 19 of the Franchise Disclosure Document is also crucial, providing representations from franchise systems about past performance and profitability expectations for their system. If this information isn’t provided by franchisor, be sure to reach out and gather feedback from current and former franchisees who may provide more insight.

Item 11 addresses the franchisor’s obligations to provide assistance, advertising, computer systems and training to franchisees. It’s essential that franchisees understand what type of support and training can expect from their franchisor, since this will have an effect on how much time and effort is needed in their business ventures.

Information About the Franchise System

The franchise disclosure document (FDD) contains essential details about a franchisor’s business system. This document details how long the company has been operating, its corporate structure and any parent companies or former owners as well as details regarding any executive team members that work there. It should also include a comprehensive breakdown of fees charged to open the franchise, both upfront and ongoing costs, territory restrictions and advertising requirements, any litigation or bankruptcy history and litigation exposure history. The FDD must also detail any obligations of a new franchisee, including whether or not he or she must take part in daily operations of the business or work full-time on it. Furthermore, it should include information regarding what control the franchisor has over what is sold and used – trademarks, patents, copyrights and proprietary information being examples.

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In their franchise disclosure document, franchisors must present potential franchisees with a chart outlining a total estimated investment for equipment or rent purchases and rent payments, along with any third-party items like equipment lease. This section of the disclosure document should help potential franchisees assess whether the business is financially sustainable by outlining whether income generated will cover expenses. It will also detail training and assistance that new franchisees will receive.

Item 3 of a franchise disclosure document details any litigation or bankruptcy history associated with the franchisor, its executives or predecessors. If any of these parties were convicted of certain crimes or found liable in settlement lawsuits filed against them – which could indicate problems within the franchise system and suggest they don’t uphold agreements or treat franchisees fairly – that may indicate potential issues within it.

If the franchisor offers or plans on offering financing to franchisees, this section must also be disclosed in their franchise disclosure document. Reading it can provide valuable information regarding financial difficulties experienced by the company and if financing can afforded for new franchisees; also included here will be details such as length of term agreement renewal options termination rights of any financing agreements made; furthermore a summary of legal rights and obligations regarding renewal, transfer or dispute resolution in regard to their franchise agreement should also be included here.

Information About the Franchisee

Franchisors must disclose specific information to franchisees in order for them to make informed decisions when considering whether to invest. These disclosures, commonly known as Item 23 disclosures, form part of a Franchise Disclosure Document’s (FDD). Each section in the FDD contains its own set of Item sections with specific duties assigned – an experienced franchise lawyer can help guide you in producing an accurate FDD.

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Item 1 provides information about the franchisor, its parents, predecessors, and affiliates as well as any business experience of management team members as well as any criminal or civil litigation against company and bankruptcy filings against it.

Item 2 describes the trademarks owned by the franchise system and how they are registered with the federal government, along with any potential disputes or conflicts concerning those marks. Additionally, this section should outline any copyrights or patents held by this franchise system.

The Franchise Disclosure Document (FDD) must disclose all initial fees required to start your franchise business, such as franchise fee, costs for equipment/inventory/training charges etc. It’s crucial that this section provides accurate disclosure as it could help identify unexpected costs that you hadn’t expected when considering this investment decision.

Your goal should be to learn whether the franchisor imposes restrictions or requirements regarding where franchisees can obtain supplies and products, remodeling requirements or services they must use for remodeling projects, or any special agreements between suppliers and franchisors that could exist between these parties. Item 3 should contain this information.

Item 4 will offer an overview of operational obligations expected of franchisees by their franchisor, such as being required to actively operate your business or providing local marketing. In this section you’ll also learn of any recurring payments required from you such as royalties for using trademarks owned by franchisors and fees covering administrative functions like marketing.

Before signing a franchise contract, it is wise to meet with both current and former franchisees of that franchise. They can provide valuable insights into its history and culture – things which may not come across clearly from brochures or websites alone.

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Information About Other Parties

When making such an important investment, it’s wise to avoid falling in love at first sight with any franchise opportunity. Instead, it is essential that the opportunity be assessed with impartiality and an objective view, so a thorough analysis of its franchisor disclosure document should be obtained prior to any purchase decision being made.

A Franchise Disclosure Document (FDD) is a legally required legal disclosure regulated by the Federal Trade Commission that contains details about a franchisor, their system and agreements that any prospective franchisee would bind themselves by. Each franchisee must receive their FDD at least 14 days before signing any documents or paying money to their franchisor.

The FDD contains 23 disclosure items and must meet specific FTC requirements to make sense of reading it on your own. To assist, we are walking through each section or “item” of the FDD in our series on franchise disclosure document basics.

FDDs begin by providing information about the franchisor and their business. This document must provide details such as their name and contact details as well as background and qualifications of their management team. Furthermore, an FDD must state whether a franchise has been in operation for at least two years as well as audited financial statements.

FDDs must provide information about any public figures connected with the franchise, including celebrities and major athletes. This document must disclose whether these individuals have agreements that confer benefits, roles and/or responsibilities on them from being associated with it in any capacity; furthermore it must disclose any representations made about earnings or revenues for that franchise.

Finally, an FDD must provide names and contact details of both current and former franchisees, along with a comprehensive list of companies owned or controlled by the franchisor and any affiliates; additionally it should identify any significant relationships or arrangements that exist between other entities and franchisors.