A Franchise Disclosure Document (FDD) is a document required by law that summarizes certain information and history of the franchisor and the franchise system, and includes copies of all form agreements that a franchisee would sign with the franchisor. The FDD describes in detail the history of the franchisor and the franchise system, current information on the franchisor and the franchise system (including financial statements and the current number of outlets in the franchised system), and the franchise system itself (e.g., products and services offered, trademarks and other intellectual property that can be used, fees, and supplier relationships).
State and federal law require that the FDD be given to any prospective franchisee before they buy the franchise or sign any binding contracts. Typically, the FDD must be disclosed to the prospective franchisee at least 14 full calendar days before the prospective franchisee signs any agreement or pays any consideration to the franchisor.
Contents of an FDD
Specifically, the FDD includes 23 “items” required by law:
- Item 1 (Franchisor Description): This section summarizes the history of and the relationship between the franchisor and its parents, predecessors, and affiliates.
- Item 2 (Management Team): This section provides biographical and professional information about the officers and directors of the franchisor’s management team.
- Item 3 (Litigation): This section discloses certain current and past criminal and civil litigation for the franchisor and its management team.
- Item 4 (Bankruptcy): This section discloses whether the franchisor or any member of its management team has declared bankruptcy.
- Item 5 (Initial Fees): This section discloses the initial franchise fees that a franchisee must pay to the franchisor to buy the franchise, and the range and factors that determine the amount of these fees.
- Item 6 (Other Fees): This section discloses all other recurring fees or payments that a franchisee must pay to the franchisor, such as royalties, marketing fees, technology fees, and training fees.
- Item 7 (Initial Investment): This section presents, in a table format with low and high ranges, the estimated costs that a franchisee will incur in building out and opening its location.
- Item 8 (Restriction on Sources of Products and Services): This section discloses the restrictions that the franchisor has established regarding the source of products or services that a franchisee may purchase for use in the business.
- Item 9 (Franchisee’s Obligations): This section provides a reference table that provides cross-references to sections in the Franchise Agreement that obligate the franchisee to do or undertake certain obligations.
- Item 10 (Financing): This section describes the terms and conditions of any financing arrangements, such as installment payments or equipment loans, offered or arranged by the franchisor for franchisees.
- Item 11 (Franchisor’s Assistance, Advertising, Computer Systems, and Training): This section describes the services that the franchisor will provide to franchisees, including pre-opening assistance such as training and ongoing assistance.
- Item 12 (Territory): This section describes any exclusive territory granted to franchisees.
- Item 13 (Trademarks): This section discloses the primary trademarks, service marks, and other trade names that franchisees are licensed to use.
- Item 14 (Patents, Copyrights, and Proprietary Information): This section discloses the patents and copyrights that franchisees are licensed to use.
- Item 15 (Obligation to Participate in the Operation of the Business): This section describes the obligation of the franchisee to participate in the actual operation of the business.
- Item 16 (Restrictions on What the Franchisee may Sell): This section describes what goods and services franchisees may offer its customers.
- Item 17 (Renewal, Termination, Transfer, and Dispute Resolution): This section summarizes, in a table format, under what circumstances a Franchise Agreement can be renewed or terminated and a franchise can be transferred or sold to a third party, as well as what rights a franchisee has when it has a dispute with the franchisor.
- Item 18 (Public Figures): This section discloses what public figures (such as public persons or celebrities) it uses to offer or sell franchises, and the amount the franchisor pays these people.
- Item 19 (Financial Performance Representations): This section allows—but does not require—the franchisor to disclose financial information such as gross sales, expenses, and profits of its company-owned locations or franchisee-owned locations.
- Item 20 (Outlets and Franchisee Information): This section lists, in a table format, the locations of company-owned outlets and franchisee-owned outlets, as well as information on when these locations opened, closed, or were transferred.
- Item 21 (Financial Statements): This section includes audited financial statements for the past 3 years.
- Item 22 (Contracts): This section includes forms of all contracts that a franchisee is expected to sign, including the Franchise Agreement and any licenses or leases from the franchisor.
- Item 23 (Receipts): This section includes a receipt that prospective franchisees are required to sign acknowledging that they received the FDD.
Registration & Renewal
The FDD must be disclosed to a prospective franchisee before they buy a franchise. In addition, some states require that the franchise offering (i.e., FDD) be registered and approved by the state before the franchisor can even disclose the FDD to the prospective franchisee and before the franchisor can offer or sell a franchise in that state.
State and federal franchise law require a franchisor to update the FDD at least annually, usually within 90 to 120 days after the franchisor’s fiscal year end, in order to continue offering or selling franchises.