Franchise Disclosure Document (FDD): Definition & Overview

KEY TAKEAWAYS

• The FDD is a legal document that acts as an agreement between two parties for a U.S.-based franchise. 
• The two parties involved are a franchisor, and a prospective franchisee. 
• The document includes essential information that is used by the parties before a significant investment is made.
• You can get an FDD from one of the four state shops. The states are California, Indiana, Minnesota, and Wisconsin.
• There are 23 sections that make up an FDD.

What Is a Franchise Disclosure Document (FDD)?

The franchise disclosure document (FDD) is a form of legal disclosure. It must be given to any party that has an interest in buying a U.S.-based franchise. This process is a part of the pre-sale due diligence. The document has all of the information that is needed. This is essential to potential franchisees who are about to make a significant investment. 

The FDD was known previously as the Uniform Franchise Offering Circular (UFOC). This was before it was revised in July 2007 by the Federal Trade Commission (FTC), which is the U.S. consumer protection agency. Once this change was made, any franchisors had until July 2008. By this deadline, they had to comply with the revisions to the document. 

The FDD has also been known as the Uniform Franchise Disclosure Document (UFDD). 

How To Get a Franchise Disclosure Document

FDDs can be purchased on a per FDD basis from the FDD Store. There are four states that publish FDDs online:

• California 
• Indiana 
• Minnesota 
• Wisconsin

Requirements for a Franchise Disclosure Document

There are a number of requirements that a franchise disclosure document must contain. There are 23 sections of any FDD, each as important as the last. Let’s take a closer look at each of these 23 sections in more detail:

Sections of the Franchise Disclosure Document

Each franchise disclosure document has essential information. This is vital for potential franchisees that are undergoing a significant investment. The document is required to contain the following 23 sections in the order that is specified. These sections are as follows: 

1. The franchisor and any predecessors, parents, and affiliates: This section is used to establish the period of time in which the franchisor has been operating.
2. Business experience: Here, you can outline the experience of the executive team. This is the team that is running the franchise system.
3. Litigation: This section is used to cover any prior actions, material actions, and pending actions that are against the franchise.
4. Bankruptcy: Here you must disclose any bankruptcies that involve the franchise. As well as its predecessors and its affiliates.
5. Initial fees: A franchisor has to disclose any fees that have been charged to any franchisees. 
6. Other fees: Any fees that are hidden or undisclosed can be a source of dispute further down the line. This means that a franchisor has to be careful to make sure that all charges are revealed and that they are fully transparent. 
7. Estimated initial investment: The franchisee must be fully aware of what the high and low range of the initial investment has to be. This includes an estimate of their working capital. 
8. Restrictions on sources of products and services: This section covers any required purchases of goods and services. This is in addition to disclosing any ownership or financial relationship between the franchise and suppliers in question that are required. 
9. Franchisee’s obligations: This section lays out the obligations of the franchisee. It is normally showcased in a reference table.
10. Financing: The financing section shows the conditions of any financing arrangements that have been put in place.
11. Franchisor’s assistance, advertising, computer systems, and training: This section explains the pre-opening and ongoing assistance that the franchisee can expect to receive from the franchisor.
12. Territory: This section can be used to indicate any geographical restrictions put on the franchisee by the franchisor. 
13. Trademarks: This section discloses the trademarks that are registered to the franchise.
14. Patents, copyrights, and proprietary information: This section discloses any copyrights, patents, and any other protected information. This would be information not covered by the trademarks section.
15. Obligation to participate in the actual operation of the franchise business: This makes it explicit as to how the franchise can be held. This is normally either held as an arms-length investment or a direct participation investment.
16. Restrictions on the selling power of the franchisee: This section covers whether only goods and services that have been franchise-approved can be sold or not.
17. Renewal, termination, transfer, and dispute resolution: This section simply outlines the described processes.
18. Public figures: The public figures section covers any person whose name or physical appearance is associated with the franchise. For example, a particular influencer, celebrity, or sportsperson who appears in commercials relating to the franchise.
19. Financial performance representations: This is used as an optional space for a franchisor to try and roughly figure out a franchise’s potential performance. This would have to be based on reasonable assumptions.
20. Franchisee and outlets information: This is where the state of the franchise is disclosed. These are normally stats that refer to how many company-owned outlets and franchised outlets are currently in operation. The time scale for this would be for the last three years.
21. Financial statements: As a part of the FDD, the franchisor must provide three years of financial statements to the franchisee. This includes statements of operations, balance sheets, owner’s equity, and cash flow. 
22. Contracts: This section of the document is where the franchisor in question outlines the franchise agreement. The section may also include things such as:
    1. Financing agreements
    2. Software licensing agreements
    3. Personal guarantees
    4. Product supply agreements
    5. Any other contracts that are specific to the situation of the franchise.
23. Receipts: Here, the franchisor will review the disclosure and business decisions. These are outlined between the two parties. They are put in place to provide the franchisee with any additional information that they believe is needed. 

Importance of a Franchise Disclosure Document

An FDD outlines comprehensive information about the roles of both of the parties involved. Those are the franchisee and the franchisor. It is designed to allow the potential franchisee to make an informed and honest decision about their investment in the business. 

As part of the pre-sale due diligence process, it is a legal disclosure document that must be presented to people interested in purchasing a U.S. franchise. The document includes information that potential franchisees need before making a sizable investment.

List of States That Require an FDD to Be Registered

The following states require an FDD to be registered with the state government agency: 

• Wisconsin
• Washington
• Virginia
• Rhode Island
• North Dakota
• New York
• Minnesota
• Michigan
• Maryland
• Indiana
• Illinois
• Hawaii
• California

Summary

An FDD is an important legal document. It gives both parties a clearer understanding of how the business relationship will exist. 

It’s vital that you understand and fully comply with everything that is laid out in this document. As it will allow you to make an informed decision about your legal obligations. It can also help you to settle any legal disputes between the franchisor and the potential franchise buyer. 

Before signing an FDD, you should always first talk to an experienced franchise attorney. This is so that they can help throughout the franchise sales process.