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Franchise Disclosure Documents (FDDs)
The Purpose of Franchise Disclosure Documents
Franchise Disclosure Documents (FDDs) are instruments designed to provide prospective franchise buyers with the information necessary to make well-informed purchase decisions. Franchisors – the owners of the established business – are required to furnish an FDD to a prospective buyer prior to signing a formal franchise agreement. A franchise agreement is a contract that includes all the terms which apply to a given franchise. FDDs have only been referred to as such for a bit over a decade; formerly, FDDs were known as a Uniform Franchise Offering Circular or UFOC. The name was changed back in 2007.
FDDs are Governed by the Franchise Rule
Franchise Disclosure Documents are governed by the “Franchise Rule,” which is a set of provisions put in place by the Federal Trade Commission (FTC). The Franchise Rule lays out all the informational and procedural requirements of FDDs which must be adhered to by franchisors. These requirements include things such as who may furnish the FDD, how the document may be transferred to the franchisee, the deadline by which the document must be received, and so forth.
Importantly, violations of the Franchise Rule by franchisors do not normally give rise to a private cause of action. If a franchisor violates one or more requirements of the Franchise Rule in its FDD, only the federal government or state governments have the right to sue. However, there is an exception to this general rule, and that exception applies when states adopt laws that expressly reinforce FDDs, as opposed to instituting their own disclosure requirements. Only in these states does a violation give rise to a private cause of action.
Mandatory Items within Franchise Disclosure Documents
FDDs are intended to educate prospective buyers so that buyers can make well-informed choices. The purpose is to prevent fraud and poor investment decisions. Toward these ends, FDDs must include certain information to be valid under the Franchise Rule. In total, FDDs must contain 23 specific pieces of information, which are referred to as “items.”
Here are the 23 most important items of FDDs:
- Description of franchisor and affiliates
- Information about the experience and history of the business
- Litigation history
- Bankruptcy history
- Details on initial fees
- Details on other fees
- Estimate of initial investment to begin franchise
- Restrictions on product sources
- Franchisee’s obligations
- Details on financing
- Details on assistance, advertising, computer systems and training provided by franchisor
- Patents, copyrights and other proprietary information
- Franchisee’s obligations to participate in business operations
- Restrictions on product menu
- Renewal, transfer, termination and dispute information
- Details on public figures
- Representations on the financial performance of units (optional)
- Information on existing franchises
- Financial statements
- Contracts to be signed
- Receipt of acknowledgment
State Level Reinforcement of FDDs
The Franchise Rule is imposed by the Federal Trade Commission, which is a federal organization. Hence, FDDs are matters of federal law. However, a number of states have reinforced the specific provisions of the Franchise Rule by codifying these provisions in their own state law. As of 2020, the State of Florida is not among the states which have codified the Franchise Rule in state law. Nonetheless, FDDs (and the Franchise Rule) must still be observed, as these documents are still requirements under federal law. In states where FDDs have been integrated into state law, violations of FDDs can be handled in state courts, as well as federal courts.
Contact a Top Miami Franchise Law Firm Today
If you’re preparing to acquire a franchise, you are strongly encouraged to consult with a franchise lawyer prior to, and during, the signing of your Franchise Disclosure Document. As you can see, these documents can quickly become quite complex, and so having a professional to help navigate and decipher these documents is advised. The team at the Trembly Law Firm has experience handling complex franchise law matters. Give us a call today to learn more.
Si usted habla español y está interesado en franquiciar un negocio existente, o iniciar un negocio en Estados Unidos, ingrese aquí para comunicarse con nosotros: https://tremblylaw.com/franchiseespanol/
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