What is Franchise Disclosure
Are you interested in obtaining a franchise license to operate your own branch of a well established brand? There are many attractive features of franchises. For one thing, your franchisor is very supportive, especially during the initial phases of opening your franchise.
This support often comes in the form of employee training and management seminars. However, you give up some control as a franchisee.
While you decide whether or not you want to be a franchise, the potential franchisor will provide you with the Franchise Disclosure Document (FDD). This form reveals important information about the franchise, such as guidance on how to use intellectual property as a franchisee and financial statements.
The idea is that the FDD gives you enough information so that you can make an informed decision about whether or not you want to pay for a franchise license and start your business.
The completed FDD is typically hundreds of pages long and is federally required by the Federal Trade Commission (FTC) to send it to prospective franchisees after the franchisor receives the initial application.
After carefully reading the form, the franchisee should have a clear idea about their obligations to the franchisor and rights as a franchisee. However, don’t worry about needing a law degree to read the FDD; the FTC franchise rule requires documents to be in “plain English.”
Sections of the franchise disclosure document
The FDDs are evenly divided into 23 sections, and they are as follows:
- Franchisor and parents, predecessors and affiliates.
- Business experience of key players in the franchise.
- Previous litigation
- Bankruptcy (any recent filings)
- Initial franchise fees
- Other expenses
- Estimated initial investment per franchisee
- Product and service source restrictions.
- Obligations of the franchisee
- Financing arrangements
- Obligations of the franchisor
- Territory / geographic restrictions
- Trademarks
- Patents, copyrights and proprietary information
- Obligation of the franchisee to participate in the actual operation of the franchise business.
- Restrictions on the goods and services offered.
- Renewal, termination, transfer, and dispute resolution.
- Public figures
- Financial performance representations (including gross sales and average revenue)
- Existing points of sale and franchisee information
- Financial statements (three-year value)
- Contracts (including the franchise agreement)
- Receipts
Bottom Line- As with any business investment, becoming a franchisee should not be decided until a major decision and consideration is made in the decision. To facilitate this, franchises are legally required to send potential franchisees complete information about the business. Whether you are a franchisor who makes up an FDD or a franchisee who wants to fully understand you, Trembly Law Firm can help. Please contact us soon and get started with a consultation.
