Joining the world of franchising can be a little overwhelming at first. There is a great amount of paperwork involved with legal terms that may be difficult to understand. That is why understanding your rights and obligations as a franchisee is the first step before actually joining the franchise system. First, you should know the difference between the Franchise Agreement (“FA”) and the Franchise Disclosure Documents (“FDD”).
What are the Franchise Disclosure Documents?
The FDD is (normally) a lengthy document that every franchisor needs to provide to potential franchisees before any agreement is signed. Amongst the items the FDD includes, there should be information such as the company’s history, financial data, and confidentiality restrictions. The Federal Trade Commission (“FTC”) requires every franchisor to disclose 23 specific items in the FDD. These items include, but are not limited to, costs and feeds, turnover rated, and legal issues. Disclosure of all items the FTC requires helps protect the persons involved and potential franchisees to determine if they would like to invest in the franchise. Finally, although the FDD can seem lengthy and overwhelming with such detail, it is essential to understand what the FDD says because it allows rooms for negotiation.
Why is the FDD important?
First, the FDD provides a great amount of information for potential franchisees to make an informed decision prior to buying a franchise. The FTC requires all franchisors to provide a copy of their current FDD to franchise applicants prior to the franchise sale. In most states, this requirement needs to be fulfilled at least 14 days prior to the sale. Applicants should do their due diligence and go through the FDD in its entirety to certify that they agree with all of what the FDD states.
What is a Franchise Agreement?
Unlike the FDD, the Franchise Agreements are legally binding contracts between the franchisor and franchisee. Upon both party’s signature, the franchisor and franchisee have established a business relationship. Different to the FDD, which could be altered, the FA tends to remain unchanged. The FA includes the franchisor’s requirements from a franchisee while operating the franchise business. The purpose of the FA is to ensure that all franchisees are treated equally. Because the FA is a legally binding contract, it is suggested you contact an attorney for help reviewing the contract. Attorneys will be able to help ensure there are no future misunderstandings.