If you decide to go down the franchise business opportunity path, one of the business artifacts you’ll become familiar with is the Franchise Disclosure Document.
Known in franchise circles as the FDD, franchisors generally send this lengthy, but important 300-page legal document to you within the first couple weeks of your introduction to the franchise concept.
Note: The Federal Trade Commission (FTC) states that “franchisors must furnish prospective franchisees with a disclosure document at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.”
In addition, “Upon reasonable request, franchisors also must furnish a disclosure document to a prospective franchisee earlier in the sales process than 14 calendar days before the franchisee signs or pays.”
What this means is that you, as a prospective franchise owner, have the right to receive the FDD 14 days before signing an agreement, or when it becomes apparent that you’ve taken steps to show that you’re interested in the offering.
The Disclosure Items
There are 22 items (plus a receipt you’ll sign stating you’ve received the FDD) that are included in every FDD.
That said, the purpose of this post is not to go through every item, one-by-one. You can do that with a franchise attorney.
Instead, I’m going to focus on the three most important items contained in the FDD.
3 Important Items Included in the FDD
1. Estimated Initial Investment
Obviously, you’ll need to know what your total upfront investment will be. This section of the FDD breaks the needed investment range* down.
*Because of variables like commercial space, leasehold improvements, and local advertising costs, you’ll be shown an investment “range.”
For example, under “leasehold improvements,” the FDD may show a range of $150,000 - $300,000.
That’s because it may cost closer to $300,000 to build out a store near Los Angeles, as opposed to building out a store in the Des Moines, Iowa area, which may cost significantly less.
In any event, make sure you look over this section of the FDD closely, so you understand how much capital you’ll have to have to start and open your franchise business.
2. Franchisee’s Obligations
It’s important to know that you have certain obligations when you’re a franchisee. And they’re all spelled out in the FDD.
A few of them include:
- Compliance with standards and policies/Operating Manual
- Restrictions on products/services offered
- Records and reports
Your franchise agreement (contract) will contain the specific requirements for each obligation listed in the FDD.
Tip: make sure you know what all of your obligations are before you move forward on a franchise you want to own.
3. Outlets and Franchisee Information
This is one of the most valuable sections of the FDD.
That’s because it contains current contact information for every franchisee in the system. Here’s what that information will look like:
Pesto77 Enterprises, LLC
d/b/a Pesto Pizza and More Centerville
45195 Center Road
Centerville, Texas, 95109
The reason why this part of the FDD is so incredibly valuable, is that you now have people you can call-and maybe even visit, who have already invested their own money in the franchise business you may buy. These are the people to reach out to with questions.
In conclusion, the Franchise Disclosure Document is something you’ll need to become familiar with as you investigate various franchise opportunities.
If you become serious about one of the franchise opportunities you’ve been researching, hire a competent franchise lawyer to go through it with you. That way you’ll understand what your obligations are going to be if you become a franchisee.