Owning a franchise provides freedom to be your own boss as well as work your…
A franchise disclosure document is a legal document that you’ll receive as a potential buyer of a franchise in the culminating process of pre-sale disclosure.
Sometimes abbreviated as an FDD, a franchise disclosure document is one that franchisors (i.e., the person granting the right) must give to franchisees (i.e., the person buying the right) according to Federal Trade Commission rules.
Part of the reason that the Federal Trade Commission (FTC) requires franchisors to give a franchise disclosure document 14 days (or more) prior to your signing a franchise agreement is so that you understand the mechanics of the franchise operation and therefore make a more informed decision.
Want to know more about how to read a franchise disclosure document, and exactly what information you’ll provide? Read on.
All FDDs are formatted the same
The really helpful thing for franchisees is that franchise disclosure documents are all formatted in the same way irrespective of regional differences, the scope of the industry, or the size of the franchise.
This makes understanding the mechanics of the franchise even easier since you don’t have to parse the FDD’s format afresh every time.
The FTC changed FDD’s rules back in 2007
Prior to 2007, franchise disclosure documents were called a uniform franchise offering circular, or simply a uniform franchise disclosure document.
Then in 2007, the FTC put the “Franchise Rule” into franchise disclosure documents to ensure that franchisees had more information on franchisors and franchises prior to the sale, and that franchise disclosure documents detailed 23 very specific items (e.g., litigation history, startup costs, obligations of the franchisee in specific scenarios) about the franchise on offer.
The changes in 2007 and the Franchise Rule were put into effect also in order to make sure there was no dissonance between the federal rule and state disclosure laws.
The FTC’s amended rule gives franchisees more information
The Federal Trade Commission recently amended its rules on the kinds of information that franchisors are required to provide prospective franchisees prior to a sale.
Now franchisors are required to provide:
- background information
- a litigation history
- any past bankruptcy filings
- fees and expenses
- statement of franchisee’s initial investment
Check out the full list of requirements here.
With the amended rule, you could get the FDD sooner
The Federal Trade Commission requires franchisors to provide the FDD to franchisees 14 calendar days prior to signing a contract or paying money to the franchisor and/or the franchisor’s affiliates.
There is an exception to this 14-day rule, though. The new FTC rule allows for franchise candidates to receive a sample copy of the franchise disclosure document “upon reasonable request” if the franchisor has received an application from the franchisee and agreed to take it into consideration.
Sample FDDs are free and digitally deliverable
This is great news for you as a potential franchisee since it means that you can hopefully receive a sample FDD sooner in the process and make a more informed franchising decision.
Also note that under the new FTC rule, franchisors cannot charge an extra fee for early delivery of a sample FDD and that a sample can be provided by the franchisor via e-mail, website or regular paper.
Item 17 (of 23) is Crucial
Item 17 of your franchise disclosure document tells you whether you can renew, terminate or transfer a franchise. Read carefully!
Want to see Signarama’s FDD? Start the process by reaching out today.