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A franchise disclosure document (FDD) is a legal document which is presented to
prospective buyers of franchises in the pre-sale disclosure process in the United States. It was
originally known as the Uniform Franchise Offering Circular (UFOC) (or uniform franchise
disclosure document), prior to revisions made by the Federal Trade Commission in July 2007.
Franchisors were given until July 1, 2008 to comply with the changes.[1]
The Federal Trade Commission Rule of 1979 which governs disclosure of essential information
in the sale of franchises to the public underlies the state FDD's and prohibits any private right
of action for the violation of the mandated disclosure provisions of the FDDs. Therefore, the
FDD implies that only the federal government or the state governments have the right to sue
and negotiate consent decrees and rescissions with those franchisors who violate the
provisions of the FTC Franchise Rule. However, various state franchise laws that provide for
use of an FDD, in lieu of their own disclosure requirements, may create private rights of action,
where a franchisor has violated its disclosure obligations in its FDD.
The Franchise Rule specifies FDD disclosure compliance obligations as to who must be the
one to prepare the disclosures, who must furnish them to prospective franchisees, how
franchisees receive the disclosures, and how long franchisees must have to review the
disclosures and any revisions to the standard franchise agreement. The FDD underlies the
franchise agreement (the formal sales contract) between the parties at the time the contract is
formally signed. This franchise sales contract governs the long-term relationship the terms of
which generally range from five to twenty years. The contracts cannot generally be changed
unless there is agreement of both parties.
Under the Franchise Rule, which is enforced by the Federal Trade Commission (FTC), a
prospective franchisee must receive the franchisors FDD franchise disclosure document at
least 14 days before they are asked to sign any contract or pay any money to the franchisor or
an affiliate of the franchisor. The prospective franchisee has the right to ask for (and get) a
copy of the sample franchise disclosure document once the franchisor has received the
prospective franchisees application and agreed to consider it. The franchisor may provide a
copy of its franchise disclosure documents on paper, via email, through a web page, or on a
disc. Franchise disclosure document requirements.[2]
According to the Federal Trade Commission,[3] there are 15 states that require franchisors to
give a FDD to franchisees before any franchise agreement is signed. Thirteen of those states
require that they be filed by a state agency for public record.
All franchise buyers should use information contained in the FDD in their franchise research.
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2See also
3References
4External links
royalties, which could indicate that franchisees are unsuccessful, and therefore, unable
or unwilling to make their royalty payments.
4. Bankruptcy.
This section discloses whether the franchisor or any of its executives have been
involved in a recent bankruptcy, information that can help potential franchisees assess
the franchisors financial stability and whether the company is capable of delivering the
support services it promises.
5. Initial Franchise Fee.
This section describes the costs involved in starting and operating a franchise,
including deposits or franchise fees that may be non-refundable, and costs for initial
inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like
royalties and advertising fees.
Training
This section explains the franchisors training and assistance program.
Advertising
This section has information on advertising costs. Franchisees often are required to
contribute a percentage of their income to an advertising fund.
12. Territory.
13. Trademarks.
This section has very important information about current and former franchisees.
Many franchisees in an area may mean more competition for customers. The number
of terminated, cancelled, or non-renewed franchises may indicate problems. The saletransfer columns can obscure churning of units through fire sales to third parties by
failed or failing franchisees. Some companies may repurchase failed outlets and list
them as company-owned outlets.
Some of the former franchisees may have signed confidentiality agreements that
prevent them from speaking. Franchisors practicing Franchise fraud may have a high
number of former franchisees under a Gag order.
If a franchisee buys an existing outlet that was reacquired by the franchisor, the
franchisor must tell the franchisee who owned and operated the outlet for the last five
years. Several owners in a short time may indicate that the location isnt profitable or
that the franchisor hasnt supported that outlet as promised.
21. Financial
Statements
The disclosure document gives important information about the companys financial
status, including audited financial statements.
A franchisee can find explanatory information about the franchisors financial status in
notes to the financial statements.
Investing in a financially unstable franchisor is a significant risk; the company may go
out of business or into bankruptcy after a franchisee has invested their money.
A lawyer or an accountant can review the franchisors financial statements, audit
report, and notes. They can help a franchisee understand whether the franchisor:
makes most of its income from the sale of franchises (Franchise fraud), or from
continuing royalties.
22.
Contrac
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23.
Acknow
ledgme
nt of
Receipt