Before you commit to a franchise agreement, remember one thing – make sure to understand the Franchise Disclosure Document. Its content is your key to unlocking the company’s inside status. Your decision to stay or give up a franchise model depends on what you’ll find out in the franchise disclosure document.
As you see, there are a lot of preparations even before owning a franchise business. The most important part of the preparation is your research and investigation of whether the company is worth it with your investment and trust.
For over 4, 000 franchise models, for sure you will not just easily pick one. A careful research is necessary to ensure success. Do not go for shortcuts as it is prone to failures. So take your time.
Think of what system interests you the most. Choose a franchising company, and begin your evaluation process. From there, your next step is to request a franchise disclosure document from the franchisor.
Study it well. You might even need a franchise consultant or a lawyer to help you understand the details in a disclosure document. Most importantly, you should be aware of everything about the company.
Why an FDD is so much important before owning a franchise business? What are the inclusions of this document? How serious is it to understand its contents?
Learn the answers to these questions as you read along.
1. What is an FDD?
The Franchise Disclosure Document or FDD was implemented by the Federal Trade Commission (FTC). Its main purpose is to declare transparency in the company’s data. The primary persons to benefit the disclosure document are those interested in purchasing a franchise – potential franchisees.
When can a potential franchisee request an FDD? At least 14 days before signing an agreement and making a payment for the franchise fee. Though this time frame is given by FTC, other places adjusted the number of days.
There are 4 States authorized franchisors to disclose their disclosure documents at least 10 working days before a franchisee signs a contract. These are Oregon, Wisconsin, New York, and Michigan. Also, there are foreign residents across the US who are potential business owners. But, the franchise disclosure document is written only in plain English language.
2. What is FDD does in a business?
First, this legal document is the bridge to connect a strong business foundation between the franchisor and the franchisee.
It is a way for the franchisor to assure the potential franchisee that its company is stable and can sustain the needs of its franchise.
Second, the honest information declared in a franchise disclosure document is like crystal-clear glass. Everything will be exposed to the potential franchisee. Nothing will be hidden, including the company’s financial status.
Third, the fdd’s function in the business is to help the company advertise its capabilities in franchising. It is a weapon to attract investors and entrepreneurs to trust its system and commit to the franchise business.
You can trust the franchise disclosure document because it is required by the FTC to make an updated and renewed document annually. At times, there are sudden changes in any detail of the company. The update is needed as soon as possible. The reason for this is to avoid any misinformation in the fdd’s content.
How did FDD start? What is it called before? And why do you have to know these details? The answers are below as you continue reading.
3. When did UFOC change to FDD?
The term FDD was once known as the UFOC or the Uniform Franchise Offering Circular. Before FDD, UFOC was first implemented by the Federal Trade Commission. The purpose is just the same with FDD.
UFOC was designed to protect all franchise companies, potential franchisees, and franchisors. But obviously, it gives much more advantage for potential franchisees. Of course, to ensure the genuine of the company.
Since some regulations in UFOC are outdated, the FTC decided to revise them in July 2007. Since then, FDD was constituted. In compliance with this, the franchisors were given up until July 2008 to pace with the new changes.
How this disclosure document started is important for you to know. With these details, you will fully appreciate its purpose. The FTC wants every potential franchisee to avoid fraud. At the same time, it is their monitoring to make sure that franchisors are giving facts about their company status.
To learn about FDD means to understand its contents. Know that there are 23 sections in this legal document. With the items below, you will see how you can take a closer look at the franchise company you’re interested in purchasing.
4. What are FDD items?
Registration of franchise system and having FDD get approved at the state level is a requirement to some states in the US. The FTC requires the Franchisors to provide the prescribed 23 items about the offered franchise. Here are the following items inside a disclosure document:
- The Franchisor and Any Parents,
Predecessors, and Affiliates - Business Experience
- Litigation
- Bankruptcy
- Initial Fees
- Other Fees
- Estimated Initial Investment
- Restrictions on Sources of Products and Services
- Franchisee’s Obligations
- Financing
- Franchisor’s Assistance, Advertising, Computer Systems, and Training
- Territory
- Trademarks
- Patents, Copyrights, and Proprietary Information
- Obligation to Participate in the Actual Operation of the Franchise Business
- Restrictions on What the Franchisee May Sell
- Renewal, Termination, Transfer, and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Outlets and Franchisee Information
- Financial Statements
- Contracts
- Receipts
5. What is the difference between the Franchise Agreement and FDD?
Both FDD and the agreement serve as two of the franchising requirements of a company. These are nearly similar documents but have different purposes.
An agreement and disclosure document sometimes bring confusion to potential business owners. You better understand each of them.
FDD
It is a document that a Franchisor will be required to produce to the prospective franchisee that contains the specific 23 items of information of the offered franchise business.
This document must be given before a new franchisee signs the agreement.
Franchise Agreement
On the other hand, this is a document that legally binds between a franchisor and franchisee. The contract contains the following:
- the right and term
- territory or the location to carry the business
- operation procedures
- franchisee obligations
- initial training
- confidentiality
- fees
- termination
Each process after signing the contract is indicated in the agreement. It is like a map that guides every step of the franchising business.
In other words, the agreement is a legal contract agreed upon by the franchisor and the franchisee. An agreement is also explained in section 22 of the FDD. It acts as a seal that locks the commitment for both parties.
Once the agreement is signed, the franchisee is obliged to follow the company policies. The franchisee also understands that there are fees needed to pay during his contract term. He agrees as well that he has to be dependent on the company’s guidance in running the franchise business to maintain brand quality.
6. Why is it important?
The specific information supplied by a franchisor to their disclosure document is vital to every potential franchisee in deciding whether to buy the franchise. These are just a few reasons of why franchise disclosure document is important:
- The franchisee will know the history and experience of the prospect franchise business. And it enables to check the recent litigation or bankruptcy history.
- FDD discloses the fees such as the royalty, marketing, and renewal cost, which are essential pieces of information a franchisor needs to supply. The totality of the gathered fees from all the franchisees is used to improve the marketing scheme of the business.
- Earning claims an FDD contains will help potential franchisees whether to buy the franchise or not. You will have clear data about the earnings achieved in the business. It will help you understand if the franchise business is profitable or not.
- The financing program is offered only in some franchise companies. Through FDD, you will know if the franchisor has financing program and how you can qualify.
- The list of their franchisees with contact information is important during the investigation process. Meeting with the existing franchisees will lay out the company’s background in terms of how well they assist them. You will know how reputable the company is as you take time reaching those franchisees.
- The FDD indicated the dos and don’ts of a franchisee. Following such policies is very important in franchising in order to maintain a good relationship with the franchisor.
Summary
Your knowledge about the Franchise Disclosure Document is your steering wheel. To turn in the right direction if the company is worth it for your investment or make a U-turn and start investigating other franchise opportunities if you think it’s not sustainable.
In this blog, you’ve learned the answers to the most frequently asked questions about franchise disclosure document. To summarize the FAQs:
What FDD is and its functions in the business?
FDD means Franchise Disclosure document. It declares the company status with transparency the potential franchisee needs to know.
What is FDD does in a business?
Details in the FDD expose the capabilities of a business in franchising. More than an FTC requirement, it serves as the all-in-one document a franchisor can provide to a potential franchisee.
When did UFOC change to FDD?
The Uniform Franchise Offering Circular (UFOC) was revised and implemented as FDD effective July 2007.
What are FDD items?
These are the 23-section list mentioned above. It starts from the company history down to its financial state, contract agreements, and receipts.
Why is FDD important?
It is important because it discloses the company details. The only way to uncover the facts about a franchising company is through an updated and registered FDD.
What is the difference between the Franchise Agreement and FDD?
A franchise agreement is a document that legally binds the franchisor and the franchisee. An FDD is the company information necessary for a franchising business.
In conclusion, never underestimate the details indicated in the FDD. Do not rush understanding it. Whenever needed, a franchise coach can guide you to thoroughly examine the data indicated in this legal document.
You may not know but there are also free franchise disclosure documents that you can access. Who knows, you might get interested in purchasing a franchise sooner or later. Remember, your strong foundation in the business depends on the FDD.