Franchise Lingo: Legal Documents

2. Legal Documents Required of Franchisors

There are two official documents that a franchisor may use to comply with the FTC Rule—the FTC Disclosure (FTC Document) and the Franchise Disclosure Document (FDD). The FTC document does not meet the requirements of most state disclosure laws, whereas the FDD is accepted (with minor differences) in all states with franchise disclosure laws. The two documents possess similarities, but the franchisor must pick one or the other. Most franchisors opt for the FDD, because of its wider acceptance. This is the document we will focus on.

What is the FDD?

The FDD is a document that contains information franchisors must provide to you by law, designed to assist you in analyzing the merits of your potential franchisor. In fact, a franchisor must provide a prospective franchisee with a FDD at their first face-to-face meeting or at least ten business days prior to the signing of the franchise agreement, whichever is earlier.

Keep in mind that neither the FTC nor any of the states has reviewed the disclosure document to determine whether the information submitted is accurate or not. They merely require that the franchisor make representations based upon a prescribed format. If the information provided is false, franchisors are subject to civil penalties. However, it is far less costly to avoid making a mistake in the first place with solid research of your own.

How can I get hold of an FDD?

Most franchisors request the following information from you before sending a copy of their FDD:

  • Assets
  • Liabilities
  • Net Worth
  • Sources of Income
  • Educational History
  • Previous Employment
  • Credit References
  • Personal References
  • Motivation for Buying a Franchise

Try to obtain an FDD before franchisor approval so that you can avoid submitting personal information to a franchise that you may not decide to pursue. Please visit FranchiseDisclosures.com for information on how you can obtain a franchisor's FDD for viewing.

So what does an FDD contain?

An FDD contains the following required information:

  1. The Franchisor and Any Predecessors
  2. Identity and Business Experience of Persons Affiliated with Franchisor
  3. Litigation
  4. Bankruptcy
  5. Franchisee's Initial Fee/Other Initial Payments
  6. Other Fees
  7. Franchisee's Initial Investment
  8. Obligations of Franchisee to Purchase or Lease from Designated Sources
  9. Obligations of Franchisee to Purchase or Lease in Accordance with Specifications or from Approved Suppliers
  10. Financing Arrangements
  11. Obligations of the Franchisor, Other Supervision, Assistance or Services
  12. Exclusive Area of Territory
  13. Trademarks, Service Marks, Trade Names, Logos, and Commercial Symbols
  14. Patents and Copyrights
  15. Obligations of the Franchisee to Participate in the Actual Operation of the Franchise Business
  16. Restrictions on Goods and Services Offered by Franchisee
  17. Renewal, Termination, Repurchase, Modification, and Assignment of the Franchise Agreement and Related Information
  18. Arrangements with Public Figures
  19. Actual, Average, Projected or Forecasted Franchise Sales, Profits, or Earnings
  20. Outlets and Franchise Information
  21. Financial Statements
  22. Contracts
  23. Acknowledgment of Receipt by Respective Franchisee

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