Franchise Disclosure Document - Explained
What is a Franchise Disclosure Document?
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Table of ContentsWhat is a Franchise Disclosure Document?History of the FDDFranchise Disclosure Document: Rights of the FranchiseeFranchise 101Sections of the FDDThe FDD: Examples of Popular FranchisesAcademic Research on Franchise Disclosure Documents
What is a Franchise Disclosure Document?
A Franchise Disclosure Document (FDD) is a type of legal document which must be presented to individuals in the United States who are prospective buyers of franchises in the pre-sale disclosure process. It is a document that contains information that is essential to potential franchisees who are about to make a significant investment. At least, ten days prior to the signing of the agreement, this document must be presented.
The Franchise Disclosure Document follows the same format irrespective of the industry, the size of the industry or any other factor. It is extremely important that prospective franchisees take their time to go through the document in order to be adequately informed before making a decision to buy.
The Franchise Disclosure Document gives standard information needed by its users the franchisee and the franchisor so that they can be informed about the duties meant to be performed by each of them respectively.
The document enables an informed decision concerning investment into a business to be made by the potential franchisee. The document which the potential franchisee must review before signing an agreement is divided up into twenty-three (23) sections. It is important to note that while this document is required by law, its contents have not been reviewed by a legal body to ensure its accuracy. This is why getting a franchise lawyer may work in favor of the potential franchisee in the long run.
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Franchise Disclosure Document: Rights of the Franchisee
According to the Franchise rule which is enforced by the Federal Trade Commission (FTC), the franchisors Franchise Disclosure Document must be received by the prospective franchisee at least 14 days before the prospective franchisee is asked to sign any contract or pay any amount of money to the franchisor or an affiliate of the franchisor.
Once the prospective franchisees application has been received by the franchisor and agreed to consider it, the prospective franchisee has the right to request and get a copy of the sample Franchise Disclosure Document. The franchisor may then provide a copy of this document on paper, via email, through a webpage, or on a disc.
Under the franchise rule, the Federal Trade Commission (FTC) defines a franchise as any continuing commercial relationship or arrangement, in which the terms of the contract specify, or the franchise seller represents, orally or in writing that; the right to operate a business that is associated with the franchisors trademark will be obtained by the franchisee, a significant degree of control can be exerted by the franchisor over the franchisees operation method or the provision of significant assistance by the franchisor to the franchisees operation method and the commitment of the franchisee to make a required payment to his franchisor or its affiliate as a necessary condition of obtaining or commencing operation of the franchise.
Sections of the FDD
Essential information needed by potential franchisees who are about to make a significant investment in a franchisors business which are contained in the Franchise Disclosure Document includes the following:
- The franchisor and any parents, predecessors, and affiliates.
- Business experience.
- Franchisees obligations.
- Representations of financial performance.
- Disclosure of initial fee and any other hidden fee.
- Disclosure of the final fee.
- Franchisees awareness of the required lowest and highest range of his initial investment.
- Restrictions on sources of products and services.
- Franchisors assistance to franchisee.
- Indication of any geographical restrictions a franchisor is putting on the franchisee.
- Patents, copyrights, and proprietary information.
- Franchisees obligation to participate in the actual operation of the franchise business
- Franchisees products sales restrictions
- Renewal, termination, transfer, and dispute resolution
- Public figures
- Franchisee information and outlets.
- Provision of three years of financial statements to the franchisee by the franchisor.
- Outline of the franchise agreement by the franchisor (contract).
- Receipts, which is the final section.
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