Examining the FDDThe purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the franchise agreement.
You may have seen a FDD before, but if you haven’t, below are tips to assist you in your exploration.
What is a FDD?
A FDD, or Franchise Disclosure Document, is a disclosure document that provides information about a franchise, for the prospective franchisee, which is required by the Federal Trade Commission. A FDD contains background information about the company and lists 23 items that cover just about everything you’d need to know the franchise.
What are the 23 items in a FDD?
- Item 1- The Franchisor- Provides the names of the franchisor, their predecessors and their affiliates. It also states the aim of the franchisor’s business and their experience.
- Item 2- Business Experience- Gives you information about the officers, directors and executives of the franchisor.
- Item 3- Litigation History- States if there is any relevant criminal or civil litigation regarding the company or its management.
- Item 4- Bankruptcy- States if the company or its managers have declared bankruptcy.
- Item 5- Initial Franchise Fee- Contains the amount the franchisee must pay to acquire the franchise, and how the franchisor settled on this amount.
- Item 6- Other Fees- Includes fees other than the initial franchise fee, including royalties, training fees, advertising contributions and transfer and renewal fees.
- Item 7- The Initial Investment- Contains a table with payments the franchisee must make to set up the business (including initial franchise fee, real estate, equipment and supplies, signs, advertising, capital, etc), as well as when and how to make these payments.
- Otem 8- Business Restrictions- States restrictions on suppliers, products, equipment, or services related to the franchise.
- Item 9- The Franchisee’s Obligations- Includes wide-ranging information about what the franchisee is required to do.
- Item 10- Financing- States whether or not the franchisor offers financing, and if so, terms will be included here.
- Item 11- The Franchisor’s Obligations- Includes wide-ranging information about what the franchisor is required to do.
- Item 12- Territory- States if the franchisee will be granted exclusive rights to a territory and whether the franchisor can set up another unit within it.
- Item 13- Trademarks- Sets out the franchisor’s trademarks, service marks and trade names that will be used.
- Item 14- Patents, Copyrights and Proprietary Information- Contains information on which of these the franchisee may use, and how.
- Item 15- Participation- States whether the franchisee must be a hands-on owner, or if they may be an absentee owner.
- Item 16- Product or Service Restrictions- States the products or services the franchisee may sell.
- Item 17- Renewal, Termination, Transfers and Dispute Resolution- Consists of a table that set the terms of the agreement- the length of the term, renewals, termination reasons, transfer rights and other items.
- Item 18- Celebrities- Lists the names of any public figures that may be involved in the venture and the details of the celebrity’s agreement.
- Item 19- Financial Performance Representation- Statement that contains what other franchisees have earned. It is important to note that the franchisor is not required to provide an Earnings Claim and the salesperson is only authorized to state numbers that are disclosed in the FDD. The salesperson, however, will assist the candidate in receiving this information from franchisees, through the due diligence process.
- Item 20- Other Units in the System- Provides information about other franchisees, company-owned outlets, the estimated number of franchises to be sold in the next year and other information.
- Item 21- Financial Statements- Provides audited financial statements of the franchisor for the past three years.
- Item 22- Agreements- Includes the franchise agreement, and any other agreements.
- Item 23- Confirmation- Contains a receipt that you must sign, which states that the franchisor provided you with the FDD.
Please go through the FDD thoroughly and make note of the questions that you have.
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