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Franchise Disclosure Document

Franchise Disclosure Document

Franchisors must comply with both federal regulations and state laws and regulations in connection with the offer and sale of franchises. These laws and regulations require that franchisors provide to prospective franchisees a Franchise Disclosure Document (“FDD”) that outlines specific information about the franchise being offered. The Federal Trade Commission (“FTC”) Rule of Franchising requires that the FDD be provided to prospective franchisees 14 calendar days prior to accepting any fees or signing any contracts.

FDD Composition

While the contents of each FDD will vary, the FTC requires every franchisor to disclose 23 specific items, including:

  1. The Franchisor and Any Parents, Predecessors, and Affiliates. This item provides a description of company background and history and requires the franchisor to disclose corporate information, such as affiliated and parent companies of the franchisor.
  2. Business Experience. This item offers biographical and professional information of the executive team managing the franchise system.
  3. Litigation. This item discloses any current or prior litigation involving the franchisor, its parents, predecessors, and affiliates.
  4. Bankruptcy. This item outlines any current or prior bankruptcy proceedings involving the franchise, its parents, predecessors, and affiliates.
  5. Initial Fees. This item establishes all upfront fees that a franchisee is obligated to pay to the franchisor prior to opening a franchised business.
  6. Other Fees. This item provides information on all other recurring fees or payments that may be required to be paid to franchisor.
  7. Estimated Initial Investment. This item discloses a low to high estimate (includes working capital), giving prospective franchisees an understanding of the expenditures required to establish a franchise.
  8. Restrictions on Sources of Products and Services. This item covers any established restrictions regarding the source of products or services.
  9. Franchisee’s Obligations. This item lays out all obligations required of the franchisee under the franchise agreement.
  10. Financing. This item depicts any terms and conditions of financing arrangements that may be provided by the franchisor.
  11. Franchisor’s Assistance, Advertising, Computer Systems, and Training. This item explains the assistance that the franchisee can expect to receive from the franchisor.
  12. Territory. This item must disclose whether the franchisee will be awarded a protected territory to conduct business. If so, it must explain the specific terms of the territory.
  13. Trademarks. This item lists and provides information on the trademarks, service and trade names that will be licensed to the franchisee.
  14. Patents, Copyrights, and Proprietary Information. This item provides information on protected information not covered under the trademarks section.
  15. Obligation to Participate in the Actual Operation of the Franchise Business. This item states the franchisee’s obligation to participate in the operation of the business.
  16. Restrictions on What the Franchisee May Sell. This item deals with any restrictions on goods and services franchisee offers to its customers.
  17. Renewal, Termination, Transfer, and Dispute Resolution. This item describes when and whether your franchise can be renewed or terminated and what your rights and restrictions are when you have disagreements with your franchisor.
  18. Public Figures. This item reveals any person or celebrity who represents the face of the franchise, as well as the amount the individual is compensated.
  19. Financial Performance Representations. Although not required, this optional item allows the franchisor to provide historical financial performance information or reasonably estimate a franchise’s potential performance.
  20. Outlets and Franchisee Information. This section provides a status of the franchise system over a 3-year period of company-owned and franchised operations locations and contact information of existing franchises.
  21. Financial Statements. This item must contain the franchisor’s audited financial statements for the past 3 years, including balance sheets, statements of operations, owner’s equity, and cash flows.
  22. Contracts. This item lists the agreements that the franchisee will be required to sign, all of which will be attached to the FDD.
  23. Receipts. In this final item, the franchisor must provide two copies of a receipt to be signed by the prospective franchisee, indicating proper disclosure and delivery of the FDD to the prospective franchisee.

The FDD is a very detailed and complex legal document (often hundreds of pages) that should only be prepared by an expert attorney. Our franchise attorneys specialize in the drafting of clear and concise FDDs that will not only comply with state laws and meet FTC disclosure requirements, but will also make accurate representations of your franchise system. We can help franchisors identify their goals and provide thorough assistance in the preparation of a well-written FDD.

Is your business ready to franchise or expand?

Whether you are exploring franchising for the first time or operating a well-developed franchise system, our franchise attorneys can answer your questions and advise you on the best course of action.

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At Fahey Schultz Burzych Rhodes PLC, we’ve been helping municipalities, franchised businesses, employers, and more with their legal needs since 2008. We’d love to learn how we can help you, too.