Franchise Disclosure Document: Definition, Inclusions, and Importance

When you have decided to purchase a franchise, one of the important documents to be look at is the Franchise Disclosure Document (FDD).

What is a Franchise Disclosure Document (FDD)?

The Franchise Disclosure Document (FDD) is a critical document that provides the franchisor’s details, including legal history, company structure, financial status and agreements, existing franchisees, and many more.

Why is FDD Important?

The FDD lets the prospective franchisees analyze and decide if they are to make the purchase or not. This also provides an opportunity to know more about the franchisor and clear up some of the little known points about the business.

What is Included in the FDD?

Now that you are aware of the importance of the FDD, it is critical to understand the things included in it.

1. Franchisor Details

Every single business-related franchisor details like business experience, related entities, overview of directors and managers, etc. should be available.

2. Existing Franchisees

The FDD must include details about past and existing franchisees, which helps you to identify and communicate with them. They are the best sources of information about the franchise and its operations.

3. Obligations of the Franchisor and the Franchisee

The franchise agreement and the FDD will include the obligations of the franchisor and the franchisee. Also, it includes restrictions put on the franchisees.

4. Litigation (If Any)

Be it small or big, if there are any ligations, then it must be included in the document. It should also contain details of bankruptcy and information about any franchisor being convicted on a serious offence.

5. Territory

The document should include the territory granted and should specify in the agreement if it is exclusive or non-exclusive. The history of the allotted territory should also be mentioned.

6. Intellectual Property

The franchisor’s intellectual property needs to be clearly mentioned, and, the restrictions on its use by the franchisees should also be clearly stated.

7. Financial Statements

The FDD should include audited financial statements like the franchisor’s equity, balance sheets, cash flow, etc.

8. Fees and Payments

Both disclosed and hidden franchise fees and payments need to be mentioned in the document.

9. Raw Material Supplies/Services

Franchisors can sell raw materials/services to the franchisees. The FDD must include these details plus the rebates that the franchisor has received from the unaffiliated vendors.

For more information on the Franchise Disclosure Document (FDD), Contact Us.