Franchise Disclosure Document is required
There are two important documents in franchising:
- The Franchise Disclosure Document
- The Franchise Agreement
The Franchise Disclosure Document, sometimes referred to as the FDD, is based on a format required by the Federal Trade Commission and in some states, needs to be presented to state regulators before you can being 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.
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.
The Franchise Agreement is the contract between the franchisor and franchisee, and governs the relationship between them. Many people 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, its not supposed to be that way; every franchisor needs to determine how it wants to licenses 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 offering properly.