Any company that seeks to create a franchise operation must develop a Franchise Disclosure Document (FDD). The FDD is a legal document that outlines many specific aspects of its franchise program. The Federal Trade Commission made the creation of an FDD mandatory under the Franchise Rule. Its a highly complex document that must feature precise wording and include state-specific addendums.
Each company’s FDD will contain unique details, but all of these documents are laid out in the same prescribed format. Every FDD includes the following sections in this order:
1. The Franchisor and Any Parents, Predecessors, and Affiliates
2. Business Experience
5. Initial Fees
6. Other Fees
7. Estimated Initial Investment
8. Restrictions on Sources of Products and Services
9. Franchisee’s Obligations
11. Franchisor’s Assistance, Advertising, Computer Systems and Training
14. Patents, Copyrights, and Proprietary Information
15. Obligation to Participate in the Actual Operation of the Franchise Business
16. Restrictions on What the Franchisee May Sell
17. Renewal, Termination, Transfer, and Dispute Resolution
18. Public Figures
19. Financial Performance Representation
20. Outlets and Franchisee Information
21. Financial Statements
Before having your FDD prepared by a franchise attorney, there are many things of which you must be aware, and many decisions you must make. You will be held legally liable for any statements and promises you make within this document. Items that require serious consideration and legal analysis include:
You will need to have a financial statement for the franchise entity. Depending on when you organized your franchise company and the states in which you register your franchise, you may be eligible for a more relaxed financial review. You will also have to decide whether and how much information to provide in your Financial Performance Representation.
You may offer your franchisees a protected or exclusive territory, though you are not required to do so. If you decide to do this, you must take into account potential business conflicts and the reservation of certain rights.
Part of the FDD involves estimating for potential franchisees a range of what their initial business investment will be. While you want to attract franchisees to your opportunity, be careful not to underestimate or under-represent the high end of the initial investment. This could be a source of future disputes.
Because the FDD lays out all the details related to your franchise offering, it will include a number of different contract agreements to be signed. Every FDD includes the franchise agreement, along with many other possible contract forms:
- Financing agreements
- Lease assignment agreements
- Personal guarantees
- Software licensing agreements
Franchising regulation is a patchwork quilt of laws in states throughout the country. You must be aware of your primary state’s registration or filing requirements, along with those in other states where you want to offer franchises. You may have to collect and deliver specific documents to each state, and these will be included in the FDD, as well.
For expert assistance in creating a Franchise Disclosure Document, call me at (516) 745-0099 or contact me for a free consultation.