The franchise disclosure document (FDD) is one of the most important things that you will receive before you start a franchise. The FDD, which is required by federal franchise law, is full of information that aims to help you make an informed decision about whether buying the franchise is in your interests or not.
Unfortunately, franchise disclosure documents are notorious for being full of technical jargon, as well as lots of areas that leave enough uncertainty to undermine the information that they purport to provide. Having an experienced franchise lawyer help you review your franchise disclosure document can make the difference between signing a franchise agreement that turns out to be lucrative for you, or one that you end up regretting for decades to come.
What is the Franchise Disclosure Document?
The franchise disclosure document is the batch of information that franchisors are legally required to provide to potential franchisees in the U.S. before they enter into a franchise agreement.
It is required by the Federal Trade Commission (FTC) in its Franchise Rule (16 C.F.R. § 436). Franchisors must provide the FDD to potential franchisees at least 14 calendar days before the franchise agreement is signed or the franchisee makes a payment related to the franchise.
There are only seven exemptions to the FDD requirement. These are listed under 16 C.F.R. § 436.8. The most important of these are when:
- The franchisee would pay less than $615 for the franchise,
- The franchisee is a large entity that has been in business for at least five years and has a net worth of $6,165,000, or
- The franchisee's initial investment would be for at least $1,233,000 and the franchisee agrees to the exemption.
These threshold amounts are inflation-adjusted and change every four years.
Failing to provide prospective franchisees with an FDD amounts to an unfair or deceptive trade practice (16 C.F.R. § 436.2).
FDDs Must Include Valuable Information About the Franchise
The whole point of the franchise disclosure document is to inform the prospective franchisee about the potential risks of their investment. Under the terms of the FTC's Franchise Rule at 16 C.F.R. § 436.5, this requires disclosures about 23 different aspects of the potential franchise agreement and relationship. Some of the most important of these requirements are details concerning:
- The franchisor, including the business experience of the franchisor's personnel,
- Any pending litigation against the franchisor, including bankruptcy proceedings,
- All fees that the franchisee would have to pay to the franchisor before the franchise is to open,
- The estimated initial investment,
- Any restrictions on where the franchisee can source its products, obtain services, or what the franchisee can sell in the store,
- The franchisee's obligations, including those related to, for example, employee training and the franchisor's trademarks,
- The terms of any financing agreement, if there is one,
- Whether the franchisor will assist in local marketing or training,
- Details about the franchisee's territory, including the franchisee's rights to acquire additional franchises,
- Trademarks, patents, copyrights, and other proprietary information,
- The franchisee's rights, including the right to renew the agreement, as well as how the agreement can be terminated or transferred,
- Dispute resolution details,
- Information about the potential financial performance of the franchise,
- Details about where to find more information about the potential franchise,
- Financial statements, and
- A copy of all proposed contracts and agreements related to the franchise offering, including a copy of the franchise agreement and any lease and purchase agreements.
Details in the Disclosure Document Can Drastically Alter the Franchise Relationship
Many of the required disclosures in the FDD can completely change the franchise relationship. Unfortunately, the details matter. For example, a franchise disclosure document can seem incredibly generous and appear to offer a business deal that would be silly to pass up. However, if the franchisee's exclusive territory is too small, then a later franchise encroachment can completely ruin the business relationship.
Franchisors know this, and frequently hide devastating details in the fine print of the FDD in an attempt to get franchisees to agree to a setup that is actually in the franchisor's best interests.
Massachusetts Franchise Attorneys at the Katz Law Group Review FDDs for Prospective Franchisees
Getting experienced legal help to review an FDD is an investment that pays off. It can open your eyes to some substantial risks and obligations that you would not have noticed and that could have undermined your business venture.
The franchise lawyers at the Katz Law Group have guided numerous prospective franchisees through the FDD review process. Contact them online or call their law office at (508) 480-8202 for help in Worcester, Marlborough, Framingham, or the MetroWest areas of Massachusetts.