The Franchise Disclosure Document (FDD) is a legal disclosure document which is provided to franchisee applicants interested in purchasing a franchise. The document is required by the Federal Trade Commission (FTC) and contains important information about the franchisor and the franchise system of which potential buyers should be aware prior to making the financial investment. It is intended to help prospective franchisees assess the potential risks and benefits involved in the relevant franchise.
What does the FDD include?
The FDD must contain a minimum of 23 itemized disclosures of the franchisor, including, for example, information regarding the services and products offered, the relevant market condition, a description of the franchise system and its managing representatives, the estimated initial investment required to purchase the franchise, the recurring costs and fees applicable during the franchise term, the franchisor’s intellectual property information, and a general description of the terms and requirements the franchisees will have to comply with. In addition, the FDD includes copies of all agreements to be executed with respect to the franchise purchase, such as the Franchise Agreement, as well as the franchisor’s most recent audited financial statements.
When does the FDD need to be provided?
The FDD must be provided to a prospective franchisee at least 14 days before any agreement is signed or any payment is accepted. There are various remedies available to franchisees who were not provided sufficient time to review an FDD prior to signing the franchise agreement, including rescission and termination. In addition to FTC regulations, many States have enacted their own requirements, laws, and regulations with respect to franchising and the offering and sale of franchises. Many States also require registration before a franchise is even offered or the FDD is provided. It is therefore important to be fully aware of the various detailed requirements imposed on franchisors before advertising the franchise, issuing the FDD, or offering a franchise for sale.