If you are someone who is thinking about buying a franchise business in the near future, it is imperative that you be aware of the essential points of Franchise Disclosure Documents (FDDs). Knowing the essential points of FDDs will give you the tools you need to review these documents. FDDs are one of the most critical documents you will deal with when you buy a franchise business. In this post, we will lay out the 5 essential things you should know about when it comes to reviewing FDDs.
Point #1: FDDs are Designed to Assist Buyers
The first thing you should understand when it comes to FDDs is the fact that these documents are fundamentally concerned with helping you as a prospective buyer. As its name implies, a Franchise Disclosure Document provides certain information about the franchise business under consideration. This information is intended to make the transaction as transparent as possible in order to avoid unfair or undesirable sales. In other words, the information within a FDD is designed to help buyers make more well-informed decisions.
Point #2: FDDs are Governed by the Franchise Rule
FDDs must adhere to the “Franchise Rule,” which is a group of provisions put together by the Federal Trade Commission (FTC). Essentially, the Franchise Rule spells out all the requirements for FDDs. This includes informational requirements, procedural requirements, and so forth. The Franchise Rule doesn’t simply lay out what must be included within a given FDD, it also gives requirements about how FDDs can be transferred, deadlines, and so on.
Point #3: Violations of the Franchise Rule Don’t Normally Create Private Actions
If a given FDD doesn’t follow the codes of the Franchise Rule, then the franchisor may face consequences for a violation. However, this doesn’t necessarily mean that the franchisee may seek a private claim against the franchisor. Unless a state has expressly reinforced the provisions of the Franchise Rule in its state law, violations of the Franchise Rule don’t give rise to private causes of action. In other words, violations of the Franchise Rule normally only allow the federal or state government to bring an action against a franchisor.
Point #4: FDDs Must Include 23 Items
A total of 23 pieces of information – or “items” – must be included within any given FDD. To be a bit more precise, a total of 21 items must be included in all cases, and then 2 additional items are normally included, but not mandatory. Readers should consult our FDD page for all the items. But the items include many things which the typical buyer would want to know about, such as bankruptcy history, litigation history, territorial issues, and so forth.
Point #5: FDDs Can Be Reinforced at the State Level
Although FDDs are a construction of the FTC, and therefore a part of federal law, they can be reinforced at the state level. When a state reinforced the rules governing FDDs at the state level, this means that violations can be dealt with in state courts, rather than just federal courts. So far, a handful of states have specifically restated the provisions of the Franchise Rule in their state codes; the State of Florida is not among this handful of states.
Contact the Trembly Law Firm for More Information on FDDs
These are just 5 points which are considered “must know” facts for the purpose of reviewing Franchise Disclosure Documents. There is plenty of other things to learn about. However, this is a good survey of the most essential points. If you would like to learn more, or if you are considering a franchise business purchase, reach out today to the Trembly Law Firm at (305) 431-5678.