What is the Franchise Disclosure Document?

The franchise disclosure document is a comprehensive document franchises provide to consumers during the franchise investigation process.

The Federal Trade Commission requires franchisors provide this document.   The FDD provides history, management information and legal agreement information.  The document was formerly known as the Uniform Franchise Offering Circular (UFOC). 

Click to get a Free FDD -UFDD - UFOC Franchise Disclosure Document

Key topics covered in the FDD include:

Franchise Fees:

There are several types of fees.  These include the initial fees you pay for rights to use the franchise name, ongoing fees or royalties, transfer fees when you sell the franchise, etc.  IInitial fees are typically in the tens of thousands of dollars.   You will want  to get a clear idea of what the overall fee structure will be for your business.

Management Background:

This includes the management background for the officers of the franchise organization. Do they have a good track record in the industry?  Or, are the backgrounds spotty, such as including bankruptcies?

Litigation:

This discloses any pending lawsuits against the franchise.  It is common to have lawsuits. Ask your franchise lawyer to review the litigation history to determine if there is any cause for concern.  Look to see if any of the senior officers been convicted of felonies or had to pay fines.

 To review a free sample disclosure document click:

   Free sample franchise disclosure document

Territory:

Do you have an exclusive right for a certain area? If not, this can be a problem. After all, you do not want to compete against other franchisees.  Some “metropolitan population” approaches to defining territory allow franchises to open across the street from each other.  Are you ok with that? 

Dispute resolution:

Often, the FDD states disputes are to be resolved via arbitration.  The FDD may also state the agreements are to be decided based on the state where the franchise is based, not where you operate.  You might also have to travel and hire out of state legal representation in the event of a dispute.  This gets very expensive very quickly.  Make sure you get  legal help reviewing and understanding this topic.

Financial Statements:

Financial statements section includes audited financial statements. How much cash does the company have? Is it losing money?

List of Outlets

This section of the FDD shows the number of outlets as well as those in development.  If there are only a few — or none at all — ask why.  Are the number of outlets growing?  If the franchise isn’t growing, ask the franchise to justify why you should invest in an organization that hasn’t been growing.

Earnings Claims

The FTC absolutely allows franchises to provide full information about the earnings of its franchise operators. Franchises have to substantiate any claims. They are also always cautious not to appear to create false expectations. As a result in most cases earnings claims are not disclosed.

Click any link below for further information on any FDD Section. (item)

FDD Items:

• Item 1 - The franchisor (and any predecessor's) background includes any affiliates
• Item 2 – Business Experience
• Item 3 - Bankruptcy
• Item 4 - Litigation history
• Item 5 - Initial franchisee fees
• Item 6 - Ongoing fees
• Item 7 - Franchisees required initial investment
• Item 8 - Restriction on sources of products and services
• Item 9 - Franchisee's obligations
• Item 10 - Financing agreement
• Item 11 - Obligation of the franchisor – training, support, marketing, etc
• Item 12 - Exclusive/designated territory
• Item 13 - Trademarks
• Item 14 - Patents and copyrights
• Item 15 - Obligations of the franchisee to participate in the actual operation of the franchise business
• Item 16 – Restriction on what the franchisee can sell, i.e. goods and service
• Item 17 - Renewal, termination, transfer, and dispute resolution
• Item 18 - Arrangements with public figures
• Item 19 - Financial performance representations - actual, average, projected or forecasted franchise sales, profits or earnings.
• Item 20 - Current franchisee/franchise outlet information.  Includes contact information of franchisees past and present
• Item 21 - Financial statements
• Item 22 - Contracts
• Item 23 - Acknowledgement receipt