If you’re considering franchising, you’ll want to be familiar with the franchise disclosure document, sometimes called the franchise FDD, of the company you’re considering joining. That’s especially true if you’re getting deeper into the franchising process to the point where you’re deeply considering an investment.
The franchise disclosure document is a crucial piece of the process of buying a franchise since it includes important information about the franchise as a whole, as well as your specific expectations and responsibilities. This vetted information—which is required to be provided before you exchange any money with the franchisor—will help you make an informed decision on whether to move forward and give you a sense of the state and operations of the company.
We’ll detail the franchise disclosure document, its sections, and review why it’s important, which questions it answers, and what you should know about reading it. You’ll be able to understand what you should take from it—which is crucial in order to go forward with confidence as a franchisee.
Franchise Disclosure Document (FDD) Explained
A franchise disclosure document (FDD) is a document provided by a franchisor at least 14 days before a franchise is purchased by a franchisee. The FDD purpose is to provide the franchisee with validated, vetted information that can help them make a decision on whether or not to go forward with the sale. FDDs are updated annually, or whenever a major decision occurs in the business. It is part of the franchise due-diligence process. The franchise disclosure document contains 23 sections that both parties must review before entering into an agreement.
The requirement for franchisors to provide an FDD is part of what’s called the FTC Franchise Rule, which ensures franchising is above board and provides potential franchisees with accurate, robust information on the company.
Basics of Franchising
It’s important to review the basics of franchising before we get into detail about the franchise disclosure document (FDD).
A franchised business is one that is owned and operated as a branch of a larger company through use of its name and processes. The franchisor is the business that is licensing their business model and trademarks for a fee; the franchisee is the person buying into the franchise and opening their own location. The franchisee runs their individual business, but they do so in the framework provided by the franchisor—how much independence (or lack thereof) a franchisee has depends on the specific franchisor.
There are significant advantages and disadvantages of franchising—it depends on the franchise that you choose and the agreement surrounding it. An important part of picking the right franchise for you is not only finding a business with which you connect and are passionate, but also understanding the terms under which you are franchising and the broader company. That’s one of the reasons a franchise disclosure document is so important.
Some common franchise businesses that you’ve likely come into contact with include:
- Food: Dunkin’, Sonic, McDonald’s
- Fitness: Orange Theory, Pure Barre, Planet Fitness
- Beauty: Massage Envy, Supercuts, Palm Beach Tan
- Services: The UPS Store, RE/MAX, Servpro
These are some of the most profitable franchise opportunities—but the list goes on and on. You’ve almost certainly visited a franchise before.
When Is a Franchise Disclosure Agreement Supplied?
A franchise disclosure document must be provided a minimum of two weeks before any money is exchanged and the agreement is finalized. Franchisees are entitled to a copy of the FDD for their records after the agreement is signed and the transaction takes place.
Why Is a Franchise Disclosure Document Important?
A franchise disclosure document, provided from the franchisor to the franchisee, is crucial in helping the franchisee understand comprehensive information about the franchisor. It outlines both the role of the franchisor as well as the franchisee and enables the franchisee to see the expectations and details involved in the decision to purchase the franchise.
Because the franchisee is required to review and sign the document before paying any franchise fees, you can be sure you have all of the information you need and questions answered to fully understand your commitment before you hand over any money.
What’s Included in the Franchise Disclosure Document?
The FDD comprises 23 sections in which the rights and requirements of the franchisee are laid out as well as other information supplied by the franchisor that the franchisee needs in order to make an informed decision. This includes things such as fees and investment, trademark and territory rights, required training, and more.
The 23 sections of the franchise disclosure document are:
- The Franchisor and any parents, predecessors, and affiliates
- Business experience
- Initial fees
- Other fees
- Estimated initial investment
- Restrictions on sources of products and services
- Franchisee’s obligations
- Franchisor’s assistance, advertising, computer systems, and training
- Patents, copyrights, and proprietary Information
- Obligation to participate in the actual operation of the franchise business
- Restrictions on what the franchisee may sell
- Renewal, termination, transfer, and dispute resolution
- Public figures
- Financial performance representations
- Outlets and franchisee information
- Financial statements
The FDD sections are standardized, though the contents will vary based on the franchise supplying it. However, the process is standardized by the U.S. Federal Trade Commission so you can ensure information is consistent with other FDDs in its breadth and depth.
How to Read the Franchise Disclosure Document
If you’ve ever read other corporate disclosure documents (such as the public company 10-K), then you’ll have a sense of what the franchise disclosure document is like.
Even if you haven’t, what’s important to know about the contents of the FDD is that the information is there to protect the franchisee. It isn’t necessarily the case now, but, in the past, many franchising relationships have been predatory on the franchisee. This document, which is filled with a substantial amount of information on the company, is there to help you understand the franchisor as well as shield you against any false or misleading claims on their part.
You’ll likely find a lot of legal disclaimers and more general language instead of specifics as a result. Since this is an incredibly important document that will affect any future franchise relationship you enter into, it’s always a good idea to have a legal professional who is experienced in franchise law to review this document before you sign.
What Questions the FDD Answers
As mentioned above, the franchise disclosure document covers 23 distinct areas. As a whole, it tells a complete story of what you should expect if you decide to go forward with the franchise agreement.
A few sections combined, however, answer specific questions that you might have as a franchisee. These questions include:
How much will I have to pay for the franchise?
The FDD covers fees including initial and total investment and the fees included within. It also details ongoing fees (such as the franchise royalty fee), marketing fees, and other fees specific to the franchise. It will also cover estimates for how much you’ll need to invest to outfit the store, insure it, operate it, and more.
What are my obligations and expectations as a franchisee?
The franchise disclosure document will cover your specific obligations in the business. It’ll also cover the financial and economic expectations of your business. This is one of the most important pieces of the franchise disclosure document, and it’s crucial that you understand the answer to this question as laid out by the FDD. Always ask for clarification before you sign anything you don’t understand.
How much support will I get as a franchisee?
The franchise disclosure document will detail things such as trademark use, marketing, copyright, supply chain support, and more. Importantly, the FDD will also define how the parent company considers territory boundaries, which are very important to making sure another franchisee doesn’t open the same business so close to you that it affects your own business.
The franchise disclosure document also gives you a sense of the history of the franchise in detail. This includes details on the parent company and their management team, but also other crucial facts such as whether the company has declared bankruptcy at any point, or whether they have faced past or have ongoing litigation. This information should be a litmus test for how the company is operated behind the scenes, and how people view the company at large.
The Bottom Line
If you’re considering opening a franchise, or are already far down the road in discussions with a franchisor, it’s important you not only know what a franchise disclosure document is but also understand its contents and implications. The information in the FDD is vital for you to get a full sense of the partnership into which you’re agreeing, including the fees, your obligations, and your rights.
If you have any questions about the franchise disclosure document you’ve received, consult an expert—you’ll want to get those questions cleared up before you sign anything. And, remember to trust your gut—if something doesn’t feel right, get more information before going forward.
- FTC.gov. “Franchise Rule”