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The most important document of any franchise, the FDD is set out to protect both parties right from the start and long into the future. So, what do you need to know when it comes to the FDD?
What is a Franchise Disclosure Document?
The Franchise Disclosure Document (FDD) is an in-depth document that discloses all the important aspects of a business. It is a legal document that all potential franchisees must read and sign. Because it is part of the pre-sale disclosure process that all franchisors are required to present to every potential franchisee, franchisees will usually sign a non-disclosure agreement prior to being given the FDD. This is because the FDD discloses very pertinent information that allows potential franchisees to weigh up the risks and benefits of buying into the franchise.
Before it was reviewed by the Federal Trade Commission in 2007, the FDD was referred to as the Uniform Franchise Offering Circular (UFOC).
Understanding the Franchise Disclosure Document
To understand a FDD, it is important to know that there are a number of key aspects that every FDD must legally disclose under Federal and State Franchise laws.
Who prepares the FDD, who hands the FDD to potential franchisees, how the FDD is handed over and how long a potential franchisee has to review the FDD are just some of the requirements set out in the Franchise Rule.
For example, the Franchise Rule requires that a potential franchisee must receive the FDD at least 14 days prior to signing any documentation or paying any money.
According to the Franchise Rule, as set out by the Federal Trade Commission, there are 23 specific items of information that every FDD must include.
What to Look for in the Franchise Disclosure Document
The majority of the 23 specific items in any FDD pertain to the franchisor, while two of the items pertain to the performance of the franchise itself.
According to franchise expert, Derek Cafferata, CEO and President of All State Franchise Finders, the FDD needs to be studied thoroughly and clearly understood in its entirety.
“It is the Franchise Disclosure Document that underlies the franchise sales contract,” says Derek. “And it is these two documents that govern the future of any franchise unit.”
The first part of the FDD discloses about the business, such as key people, parent companies and affiliations, business experience, litigation and bankruptcy. The next few items cover costs and fees, including the initial franchise fee, other related costs and an estimate of initial investment. Items 8 and 9 cover restrictions and the franchisee’s obligations. Item 10 discloses information regarding financing. It is here where the franchisor will disclose whether they offer franchisor financing. The next section of the FDD covers topics about the running of the franchise, including territory, trademarks, copyrights and proprietary information. Item 17 covers renewal, termination and modification of the contract as well as disputes resolution.
The next section of the FDD covers financial information, including financial performance representations and the franchisor’s financial statements.
“The FDD is a very valuable piece of information that must be carefully read and clearly understood,” says Derek. “Before signing this document, a franchisee should seek the experienced advice of a lawyer, accountant and franchise expert.”
Expert Advice with All State Franchise Finders
For expert franchising advice, especially when it comes to franchise documentation and contracts, it is important to seek the right advice. Derek Cafferata has over 30 years’ experience in the franchising industry. He and his team at All State Franchise Finders are ready and able to help you through the process of franchise selection, signing and setup. Contact All State Franchise Finders on 1800-544-2161 or visit demo.allstateff.com today. All State Franchise Finders are your franchise experts.