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What’s An FDD And How Do I Build A Strong One?

One of the most critical items you will ever develop as a new franchisor is your FDD, Franchise Disclosure Document (FDD).

While not all states require franchisors to register or file an FDD, under the Franchise Rule of the U.S. Federal Trade Commission (FTC), franchisors are required to provide all potential franchisees with a legal disclosure document that includes 23 specific items of information, before they sign a franchise agreement.

What is a Franchise Disclosure Document?

Well, it’s effectively THE contract between franchisors and franchisees. Virtually all the relevant financial, legal, and substantive business aspects of the franchise company appear in the FDD.

The FDD provides biographical information about the franchisor and company officers, any pending litigation, current franchisees, fees, initial investment costs, franchisee obligations, intellectual property, financial statements, selling restrictions, contracts, receipts, and much more. Most FDDs are 100 to 200 pages long although some are even longer.

In the world of public companies, there is a similar document called a 10K or Q-10 Report, which discloses everything about the company, including market risks, to the SEC and shareholders. The FDD is roughly a franchise-business equivalent.

When Does a Franchisor Disclose their Franchise Disclosure Document?

Qualified candidates, or potential franchisees, who want to move forward and open a franchise for you, must receive an FDD from the franchisor at least 14 days before the signing of a Franchise Agreement.

This creates a two-week period for the franchisee to study the aspects of the business and evaluate the risks and benefits of investing in the franchise, before formally signing onto it. This also allows time for the franchisee to review the FDD with an attorney. We strongly urge all potential franchisees to work with an attorney who practices franchise law.

It’s important to realize it’s the Franchise Agreement and not the FDD, that is signed by all parties. The FDD serves as one last opportunity for franchisees to familiarize themselves with the franchisor before inking the deal.

Why Is It Important and How Often Should FDDs Be Updated?

Franchisors must update their FDDs annually, within 120 days of the end of the franchisor’s fiscal year. Since the FDD will need to be re-registered and re-filed in the states that require it, a franchise attorney at your side will ensure it will stand up to regulatory scrutiny and any questions will be promptly and professionally handled. A well-executed FDD protects all parties involved and can minimize the risk of litigation down the road.

If you’re a franchisor in need of guidance on ways to approach your FDD or Franchise Agreement, there are resources to help you. Contact FranchiseYourBusiness.com today to get started by requesting a free consultation!