Understanding the Franchise Disclosure

Interested in obtaining a franchise license to operate your own branch of a well-established brand? There are a lot of attractive features of franchises. For one, your franchisor supplies you with plenty of support, especially during the initial phases of opening your franchise. This support often comes in the form of employee training and management seminars. However, you do give up some control as a franchisee.

While you’re deciding whether or not you want to be a franchisee, the potential franchisor will furnish you with the franchise disclosure document (FDD). This form discloses important information about the franchise, such as guidance on how to use intellectual property as a franchisee and financial statements. The idea is that the FDD will give you enough information for you to then make an educated decision on whether or not you want to pay for a franchise license and begin your business. 

The full FDD is usually hundreds of pages long and is federally required, by the Federal Trade Commission (FTC), to send to potential franchisees after the initial application is received by the franchisor. After thoroughly reading through the form, the franchisee should have a clear idea on his or her obligations to the franchisor and rights as a franchisee. Don’t worry about needing a law degree to read the FDD, though; the FTC’s franchise rule mandates that the documents be composed in “plain English.”

Sections of the Franchise Disclosure Document

FDD’s are uniformly divided into 23 sections, and they are as follows:

  1. Franchisor and any parents, predecessors, and affiliates
  2. Business experience of key players of the franchise
  3. Prior litigation
  4. Bankruptcy (any recent filings)
  5. Initial franchising fees
  6. Other expenses
  7. Estimated initial investment by franchisee
  8. Restrictions of products and services sources
  9. Obligations of franchisee
  10. Financing arrangements
  11. Obligations of franchisor
  12. Territory/geographic restrictions
  13. Trademarks
  14. Patents, Copyrights, and Proprietary Information
  15. Obligation of franchisee to participate in actual operation of franchise business
  16. Restrictions on goods and services offered
  17. Renewal, termination, transfer, and dispute resolution
  18. Public figures
  19. Financial performance representations (including gross sales and average incomes)
  20. Existing outlets and franchisee information
  21. Financial statements (three years’ worth)
  22. Contracts (including franchise agreement)
  23. Receipts

Conclusion- As with any business investment, becoming a franchisee should not be decided until significant thought and consideration is made into the decision. To make it easier, franchises are legally required to send potential franchisees comprehensive information about the business. Whether you are a franchisor composing an FDD or a franchisee who wants to fully understand it, Trembly Law Firm can help out. Please reach out to us soon and get started with a consultation.

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