legal Documents Required in franchising

It's essential to understand what is required by law when starting a franchise system. There are two ​legally required documents you should become very familiar with before ​franchising your business: the Franchise Disclosure Document, and the Franchise Agreement.

The Federal Trade Commission (FTC) "Franchise Rule" governs franchising in the United States, and requires that franchisors have certain legal documents in order to offer a franchise: the Franchise Disclosure Document (FDD), and the Franchise Agreement.

THE FRANCHISE DISCLOSURE DOCUMENT

The Franchise Disclosure Document, also referred to as the FDD, is based on a format required by the Federal Trade Commission, and in some states must be presented to state regulators before you can ​begin to offer franchises. (The Franchise Agreement, which governs the relationship between the franchisor and franchisee, is part of the disclosure document.) The FDD needs to be provided to the prospective franchisee no less than 14 days before they are to sign their franchise agreement, and the franchisee needs to have the completed agreement for at least 7 days. The 7-day period can run at the same time as the 14 days. MSA Worldwide provides a complimentary Franchise Disclosure Compliance Calendar ​as a reference tool for calculating the disclosure timing requirements mandated by FTC regulations and various state laws.

The FDD’s primary role is to provide prospective franchisees with the information required by franchise law and includes information on the franchisor, the company’s leadership team, bankruptcy and litigation history, initial and ongoing fees, the initial investment a franchisee needs to make to open their business, the fees that will be charged, and detailed information about the intended franchise relationship. All current and past franchisees' contact information is also provided in the FDD.

For ​an overview of the 23 Items ​included in an FDD, and the regulations governing franchise disclosure, see our educational videos How to Develop a Franchise System Part 9: How Franchising Works and Part 10: The Regulatory Framework of Franchising.

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THE FRANCHISE AGREEMENT

The Franchise Agreement is the contract between the franchisor and franchisee, binding them together, and governs the relationship between them. The Franchise Agreement explains what the franchisor (the licensor) expects from the franchise (the licensee) in running the business, and is designed to ensure that all of the franchisees within an organization are treated equitably​. The Franchise Agreement also describes the support that the franchisee will be provided by the franchisor. Always remember that the relationship between franchisor and franchisee is contractual - what you have in your written documents is essential. 

ONE SIZE DOES NOT FIT ALL

Many who are new to franchising believe that since the government defines the items that must be disclosed to franchisees, that the information provided by a franchisor and the terms of the contract are similar regardless of which franchise system you are looking at. While this is frequently true of franchise systems developed by franchise packaging firms, it's not supposed to be that way; every franchisor needs to determine how it wants to license its brand and system to its franchisees.

What is included in the FDD and Franchise Agreement is based on a host of considerations unique to each brand, and it is important that you structure your particular franchise offering properly. It's vital that you work with qualified franchise advisors to develop your franchise system and legal documents.