How Can the Franchise Disclosure Document Help You Make a Good Buying Decision?

By: Doug Smith, Franchise Attorney
 
The Franchise Disclosure Document (FDD) is an informational prospectus that gives information about the franchisor, the franchise system, and the franchise agreement. Prospective franchise buyers should use the FDD to help them make an informed buying decision.
 
The franchisor must deliver to a prospective franchisee a full copy of the FDD and all of its exhibits at least 14 calendar-days before any franchise agreements are signed or any money changes hands. Some states require different waiting periods. Prospective franchisees should take advantage of this "cooling off" period. It is intended to give prospective buyers time to review franchise documents and investigate the franchise before buying.
 
The FDD is divided into 23 separate sections. Examples of important issues outlined in the FDD are the following:
 
* The franchisor's business history and experience;
* Work experience of owners, officers and other individuals in the franchisor's organization;
* Litigation history for the franchisor and related entities;
* Bankruptcy information for the franchisor and related entities;
* Initial and ongoing franchise fees;
* Initial investment estimates;
* Restrictions on sources of products and services;
* Information about the franchise agreement and related agreements, including provisions related to renewal, termination and transfer of the franchise business and dispute resolution;
* Franchisor's training, advertising and other obligations;
* Sales area protections (if any);
* Status of franchisor's trademarks;
* Franchisor's representations about financial performance;
* Information about existing and past franchisees; and
* The franchisor's financial condition.
 
Unfortunately, many people buy a franchise without thoroughly reading the FDD and the franchise agreement. Later, they are surprised by negative information about the franchisor, the franchise system or the franchise contract that was available to them before they bought. Prospective franchisees who carefully review the FDD both individually and with experienced advisors (such as a franchise lawyer, accountant, or franchise business consultant) are better prepared to make a good investment decision.