In the spirit of full transparency in business negotiations, the Federal Trade Commission (FTC) makes all franchising companies present relevant financial information to prospective partners. Without this standard disclosure, it would be uncertain just how healthy a company really was. Those desperate to hook an investor would be able to hide defects in order to close a deal. Then, the franchisee would be in trouble because they would be working under false assumptions.
Many entrepreneurs (a franchisee) who have decided to become a subsidiary of a larger business (a franchisor) use this document, called a Franchise Disclosure Document, as a means of getting to know the parent company. They peruse this information before making a final decision of whether to join the brand.
Nevertheless, it is important to always remember that the FTC does not provide oversight into what actually appears in company FDD. For this reason, prospective franchisees must work with a competent attorney to ensure that what appears in print is in fact correct.
What Does the FDD Contain?
There are 23 categories that comprise the FDD. These details must be sent to the potential franchisee 14 days prior to their signing the final contract (franchise agreement).
The wording of this franchise disclosure document must be written in “plain” English so that the average business person can understand what he or she is reading. Regardless, most entrepreneurs should seek legal advice to be certain that they do not make a mistake.
Here are the 23 categories, in order, that make up the FDD:
1. Name of the franchisor, any parents, predecessors and any other affiliates
2. Business experience, identity and qualifications of key personnel
3. Any history of legal action, either as plaintiff or defendant
5. Initial franchising fees
6. Additional fees
7. Estimate of the total initial investment cost
8. Restrictions on sources of products and services
9. Franchisee’s Obligations
11. Franchisor obligations including: assistance, advertising, computer systems, manuals and training
14. Patents, copyrights and property information
15. Duty of franchisee to be in actual operation of the franchised business
16. Restrictions on what the franchisee may sell
17. Renewal, termination, transfer and dispute resolution
18. Public Figures
19. Financial performance representations
20. List of outlets and franchisee information
21. Financial statements
22. Sample written contracts
23. Acknowledgment of receipt of FDD
Understanding the FDD
As one may assume, this document can be quite long, often reaching over 300 pages for large business entities. It might be tempting to skip over pages, but you should carefully read over each one. Any violations should be reported to the appropriate government agency, in this case the FTC, for possible prosecution.
If you are involved in a franchise relationship, whether as the parent company (franchisor) or entrepreneur (franchisee), be sure to contact the experienced attorneys at Shelton Law & Associates before making a final decision. As shown here, the FDD is a sensitive document that requires competent advice on how to craft, read and interpret it.