What is a Franchise Disclosure Document?
The Franchise Disclosure Document (FDD) is the most important document you’ll encounter during your franchising journey. Required by the Federal Trade Commission (FTC) Rule, the FDD ensures that every franchisor provides comprehensive and transparent information to potential franchise buyers. This document contains validated details that empower you to make informed decisions when considering a franchise opportunity.
The FDD forms the legal foundation for any franchise agreement, ensuring compliance with all relevant franchise laws and regulations. It is crucial for aspiring franchisees to understand how to read and interpret the FDD, as it includes 23 distinct sections or “items” that address specific questions and critical details about the franchising company.
For easier navigation, we’ve broken down the FDD by individual items. Knowing what to look for in each section will help you identify key information about franchise fees, company history, legal issues, and management details. This structured approach makes the FDD less overwhelming and helps you focus on the areas most important to your franchise investment.
Franchise Disclosure Document Requirements
Item 1 – Company Information
Within this item, the franchisor must disclose corporate information about the history of the company, any affiliates, and parent companies of the franchisor.
Item 2 – Franchisor Team & Company History
This item gives information about the franchisors' management team and the operational history of the business.
Item 3 – Litigation Disclosure
Item 3 discloses any litigation that previously or currently involves the franchisor, the parent company, predecessors, and/or individual management members listed in Item 2.
Item 4 – Bankruptcy Disclosure
This item discloses any bankruptcy by the franchisor, founder, or management members.
Item 5 – Upfront Franchise Fees
Within this item, the franchisor must disclose all upfront franchise fees that the franchisee must pay before opening the franchise location. This item commonly includes initial fees and other upfront fees such as fees for opening inventory and equipment.
Item 6 – Additional Franchise Fees
This item discloses all other fees the franchisee must pay during the terms of the franchise agreement. This includes ongoing royalties, brand development funds, marketing, technology, training, renewal, and any other fee the franchisor requires.
Item 7 – Franchise Startup Costs
The franchisor must include low to high estimates of potential costs for a franchise to establish and open. The estimate will include build-out costs to reserve capital for the first three months. This is meant to show an entire estimate of all costs.
Item 8 - Required Purchases and Supplier Revenue Explained
This item discloses the products and supplies the franchisee must buy from the franchisor and ongoing operational items. The franchisor must also disclose in the section the revenue and rebates the franchisor earned from selling source restricted supplies and products to other franchisees.
Item 9 – Franchisee Obligations
Item 9 discloses all obligations as a franchisee under the franchise agreement. This includes all legal obligations and obligations upon terminating the franchise agreement.
Item 10 – Franchise Financing
Within this item, the franchisor discloses whether the franchisor offers financing to initial fees to be paid by the franchisor or in connection with the franchised business.
Item 11 – Franchisee Support
This discloses and details the assistance the franchisor gives the franchisee, including advertising requirements, training, and technological resources the franchisee will be required to utilize.
Item 12 – Franchise Territory
Item 12 defines whether the territory is protected, how the territory will be determined, and if the franchisor reserves rights to operate within the franchisee's territories.
Item 13 – Franchise Trademark
Within this item, the franchisor will disclose information about the trademarks of the franchise systems, whether they are registered with the United States Patent and Trademark Office, registration status, and if there have been trademark conflicts or disputes.
Item 14 - Franchise Intellectual Property
This item details information about any patents, copyrights, and other proprietary information related to the franchise system.
Item 15 – Franchise Obligations
The franchisor discloses what obligations, if any, the franchisee must have in day-to-day operations of the franchised business, including whether they must work in the franchised business on a full-time basis.
Item 16 – Franchise Limitations
Disclosed in this item is the franchisor's control on what a franchisee may or may not sell.
Item 17 – Franchise Legal Rights
Within this item, the franchisor must disclose the legal rights and obligations related to the renewal, termination, and transfer of the franchised business. This must also include a summary of legal disputes that are resolved between the franchisor and franchisee.
Item 18 – Use of Celebrities & Public Figures
In this item, the franchisor discloses if any public figures or celebrities are hired to promote the franchise system.
Item 19 – Franchise Earnings Claims
Item 19 is where the franchisor discloses whether it is making any financial performance representations. This means if the franchisor provides information about sales or a specific level or range of actual or potential sales, income, gross profits, or net profits.
Item 20 – Franchise Growth
Within this item, the franchisor must disclose the franchise and corporate outlets over the last three years and a projection of future openings in the next year.
Item 21 – Financial Statements
Item 21 discloses copies of the franchisor’s financial statements.
Item 22 – Franchise Contracts
This item includes all the contracts that the franchisee must sign for the franchisor.
Item 23 – FDD Receipt
The franchisor must include two copies of the receipt page. The franchisee must sign the receipt to prove proper disclosure and delivery of the FDD.
The FDD Process
The Franchise Disclosure Document (FDD) must be provided to the prospective franchisee at least 14 days before signing the franchise agreement. This 14-day waiting period begins on the day the franchisee signs the FDD, not on the day they sign the franchise agreement. When counting both the first and last days, the total period is 16 days. There is also a separate seven-day waiting period, which may overlap with the 14 days if the franchisor has finalized details such as the specific franchise territory. In this case, the franchisor can deliver the completed franchise agreement for the franchisee to sign along with the FDD.
While the FDD contains essential information—such as financial performance representations, outlet data, financial statements, required contracts, and receipt pages—it's crucial to read each section thoroughly before committing to a franchise.
The FDD does not include insights or reviews from current franchise owners, which are invaluable for understanding day-to-day franchise operations. Prospective franchisees should research and connect with existing franchisees during the validation stage to gain a deeper perspective on how the franchise is managed.
Taking the time to review the FDD and seek additional feedback ensures informed decision-making and helps avoid potential pitfalls when entering into a franchise agreement.
Learn more about Franchising:
Becoming a franchise owner typically takes five to six months from research to purchase. The Franchising U blog series offers a step-by-step guide you can follow at your own pace.
Step 1: What Is Franchising?
Step 2: Researching Franchises To Own
Step 3: What Will Be Required Of Me If I Buy A Franchise?
Step 4: Introductory Calls & Meetings With Potential Franchise Brands
Step 5: What Is A Franchise Disclosure Document (FDD)?
Step 6: What Is Being A Franchise Owner Like?
Step 7: Meeting The Franchisor Team
Step 8: Decision Time
Step 9: Signing Day
Step 10: What It’s Like Running A Franchise Business?
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