If you are a potential franchisee considering investing in a franchise, one key step in your due diligence is will be to receive and review the Franchise Disclosure Document, or FDD. The purpose of the FDD is to give you an informed understanding of the risks, obligations, and other important information associated with your potential investment.
Under federal law, you should receive the FDD at least 14 days prior being asked to sign any agreements or invest any money with the franchisor or its affiliates.
The FDD should include information about the franchise opportunity relating to the following 23 topics and issues:
- The Franchisor and any Parents, Predecessors, and Affiliates: This section identifies the franchisor and affiliated companies.
- Identity and Business Experience of Key Persons: Here, the FDD names and describes key individuals associated with the franchise, including their business experience.
- Litigation History: Past and pending material lawsuits the franchise has been involved in.
- Bankruptcy: Bankruptcy history related to the franchise, its affiliates, key individuals.
- Initial Franchise Fee: All fees payable at the outset of buying into the franchise.
- Other Fees and Expenses: Recurring or occasional fees associated with operating the franchise.
- Franchisee’s Estimated Initial Investment: This includes all fees payable to franchisor at beginning as well as other costs of starting up a franchise.
- Restrictions on Sources of Products and Services: This relates to requirements of the franchisee to purchase products and services from the franchisor.
- Obligations of the Franchisee: Requirements the franchisee must complete, i.e. getting approval of a store location.
- Financing Arrangements: All material terms and conditions of financing arrangements between franchisor and franchisee.
- Obligations of the Franchisor: How the franchisor will commit to help the franchisee, e.g. training, advertising, software, etc.
- Territory: Assigned territories and sales restrictions applicable to the specific franchisee.
- Trademarks: Information related to the franchisor’s registration of relevant trademarks and any pending trademark litigation.
- Patents, Copyrights, and Proprietary Information: Similar to 13, information related to ownership of intellectual property and any pending, relevant litigation.
- Obligation of the Franchisee to Participate in the Actual Operation of the Franchise Business: Any requirements put on the franchisee to participate in running the franchise, i.e. the owner must manage the business.
- Restrictions on Goods and Services Offered By the Franchisor: For example, whether the franchisee must sell all products offered by franchisor and whether the franchisee must exclusively sell franchisor’s products.
- Renewal, Termination, Repurchase, Modification and/or Transfer of the Franchise Agreement, and Dispute Resolution: How the franchise agreement will be modified or renewed, and how disputes (e.g. lawsuits) should be resolved.
- Public Figures: Information related to famous individuals associated with the franchise, e.g. the compensation paid to celebrity spokespeople.
- Financial Performance Representations: Representations about the franchise’s historical and projected financial performance (note: this disclosure is optional on the part of the franchisor).
- List of Franchise Outlets: The number of franchised and company-owned outlets for the previous three years.
- Financial Statements: Audited financial statements for the previous three years.
- Contracts: Copies of all proposed contracts required in the franchise agreement.
- Acknowledgment of Receipt: This section simply asks you to acknowledge you received the necessary information by providing the franchisor with a signed receipt.
While lengthy and often complicated, FDDs are an extremely important part of your due diligence in investing in a franchise, and an experienced franchise attorney can help guide you through this process.
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