The Franchise Disclosure Document (FDD)
By Matt Dickstein
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A franchisor must give a detailed franchise disclosure document to all prospective franchisees. This document is called the Franchise Disclosure Document (FDD).
The franchise disclosure document is highly regulated. Federal and state laws require very specific disclosures and language for every single page of the document. The required disclosures are long and complex, covering 23 separate items of disclosure. The disclosures cover the entire franchised business, including:
1. Requirements for initial investment, including the franchise fee.
2. Physical property requirements, such as location, building, equipment and supplies.
3. Operating practices.
4. Initial and on-going training and assistance given by the franchisor.
5. Advertising and marketing obligations of the franchisor.
7. Bookkeeping, accounting and reporting requirements.
8. The franchisee’s protected territory
The FTC’s instructions for the franchise disclosure document run over 50 pages, and give you precise and exhaustive instructions for each item of disclosure. I give you fair warning: Drafting the FDD requires a large amount of your, the franchisor’s, time.
The FDD is your friend.
Even though the FDD is long and complex, keep this in mind: The document is your friend. The FDD helps both the franchisor and the franchisee. The franchise disclosure document protects a franchisor by permitting it to disclose all negative facts up-front to franchisees. Franchisees cannot sue you for facts you disclosed up-front to them. Disclosure is good, and the more the better. From the franchisee’s perspective, the franchise disclosure document is good because it contains in one place nearly all the relevant disclosures that you need to evaluate a franchise.
Defective FDD = liability.
Remember that disclosure is good. Conversely, an incomplete and inaccurate FDD can lead to litigation later on. Lawyers representing your franchisees will view a bad franchise disclosure document as a goody-bag of fun. They will bring multiple claims against you, the franchisor, based on the defects in the disclosure document. Their favorite claim is that the defects in your franchise disclosure document violated the FTC Franchise Rule and constituted an unfair trade practice.
For these reasons, smart franchisors invest their time and money up-front in drafting a solid franchise disclosure document. Smart franchisors make real disclosure of real facts about their franchise system; they do not rely on form FDDs bought on the internet or copied from another franchisor.
You should hire a franchise attorney to help you prepare your Franchise Disclosure Document. The job must be done right – the risks are too high to do it wrong.
If you want to read more about franchising, try my main page Franchise Attorney. From there you can link to other pages and articles of interest.