Guide To Creating Your FDD
Every industry has its own lingo and franchising is no exception. One of the most common abbreviations heard is also one of the most critical to the transparency of the franchising process. That is: the FDD, or Franchise Disclosure Document.
The FDD is created by the franchisor or more specifically a franchise attorney or franchise development firm that understands the nuance of franchise law. It is required by the Federal Trade Commission (FTC).
Franchisees receive the FDD from a prospective franchisor within at least 14 days of signing a Franchise Agreement. The FDD itself does not solidify the business deal; it engenders a review period with the franchisee’s lawyer (who is preferably experienced in franchise law). This is the time to identify any questions or concerns and work through them with the franchisor to at least minimize the possibility of any issues arising once the agreement is signed by both parties.
Did you Know That 13 States Require Franchisors to Register Their Franchises?
Disclosure Documents (FDD) as a requisite for running franchise operations there? That includes states like California, New York, and Illinois, which have some of the largest markets.
An additional 10 states require an FDD to be filed as part of doing business there, although they don’t have franchise-specific rules.
Let’s take a look at what goes into an FDD, which by the way is often between 100 and 200 pages long, although some are upwards of 300 pages.
What Goes Into an FDD?
An FDD must have 23 Items that delineate what kind of business you are, the basic standard operating procedures for franchisees, and other vital legal information that governs the franchise relationship.
For a full list of all 23 items that appear in an FDD, visit the helpful reference.
What Questions Does the FDD Answer?
We can break down an FDD, and its 23 items, into roughly seven broad topics or research questions.
- Who is the Franchisor?
Particularly at the beginning of the document, there’s a lot of space for biographical information about the franchisor as a business professional, but also the business model itself. Here’s also where you can discover whether the business is experiencing litigation or other entanglements.
- How Much Does the Franchisee Earn?
The franchisor must be careful with this topic because it can be grounds for a lawsuit if they make too many specific forecasts regarding the franchisee’s earning potential. For this reason, Items 19 and 21 tend to be rather vague, but this is where franchisees get an opportunity to look over financial statements and get a feel for their profitability.
- What are the Franchisee’s Investments and Fees?
Items 5, 6, 7, and 10 all deal with up-front costs and royalty fees. Since launching a franchise might be a significant expense, sometimes Item 10 may include information about financial assistance for franchisees.
- What Does the Franchisee Get as Part of Their Investment?
Franchisees will want to know what they get from their investment and fees. Item11 and Item 13 elaborate on all the branding opportunities, trademark options, pre-opening assistance, training, and other benefits for becoming a franchise.
- What are the Franchisee’s Obligations and Restrictions?
Item 8 and Item 12 cover some of the rules the franchisee must abide by. Here they will find information about what products can be bought, any restrictions on the use of products and services, how to solicit/advertise, the boundaries of the franchise territory, and how to interact with customers.
- How Does a Franchise Agreement Terminate?
Item 17 explains how you renew or close a franchise term. This also includes mediation measures for disputes, should they arise. The goal is to avoid litigation by having constructive resolution processes in place from the beginning.
- Where do you Sign?
Item 22 includes a list of all the legal agreements and contracts that are attached to the FDD. The franchise agreement is the primary contract, but leases, options, financing agreements, and others may also be included. Item 23, is the final item and includes the pages you sign to acknowledge your receipt of the FDD. This officially forms the franchisor/franchisee relationship.