Sections of the Franchise Disclosure Document (FDD) to pay attention to
Updated: Sep 6, 2019
You may have seen an FDD before, but if you haven’t, below are tips to assist you in your exploration. What is an FDD? The FDD, or Franchise Disclosure Document, is a disclosure document that provides information about a franchise, for the prospective franchisee, which is required by the Federal Trade Commission. The FDD contains background information about the company and lists 23 items that cover just about everything you’d need to know the franchise.
The FDD has 23 categories, called “Items,” as required by the Federal Trade Commission; they’re all important, Here are 6 to pay particular attention to:
🔹Item 1- The Franchisor- Provides the names of the franchisor, their predecessors and their affiliates. It also states the aim of the franchisor’s business and their experience.
🔹 Item 4- Bankruptcy- States if the company or its managers have declared bankruptcy.
(Items 5 AND 6) - These two items will break down costs.
🔹Item 5- Initial Franchise Fee- Contains the amount the franchisee must pay to acquire the franchise, and how the franchisor settled on this amount.
🔹 Item 6- Other Fees- Includes fees other than the initial franchise fee, including royalties, training fees, advertising contributions and transfer and renewal fees.
🔹 Item 19- Financial Performance Representation- Statement that contains what other franchisees have earned. It is important to note that the franchisor is not required to provide an Earnings Claim and the salesperson is only authorized to state numbers that are disclosed in the FDD. The salesperson, however, will assist the candidate in receiving this information from franchisees, through the due diligence process.
🔹 Item 20- Other Units in the System- Provides information about other franchisees, company-owned outlets, the estimated number of franchises to be sold in the next year and other information.
Hiring a franchise attorney is strongly suggested to help you understand the FDD. Make sure to go through the FDD thoroughly and make notes to ask the franchisor.