From Content to Comprehension
Franchise companies are required to publish a Franchise Disclosure Document (FDD) annually and according to the then-current guidelines of the Federal Trade Commission. They are also required to provide this document to people who want to learn about their franchise opportunity as potential applicants for their franchise. When you are provided an FDD, the company representative will ask you to sign a receipt for the document to track that they are fulfilling this requirement.
Upon receipt of an FDD it is expected that you will review the document and make note of any questions that arise. Most franchise representatives invite you to meet with them by phone to review the FDD, highlighting key components and also addressing your questions. It is common for this meeting to be required by the franchise company, meaning if you do not review the FDD as part of your 'homework' the evaluation process will come to a halt.
The purpose of the FDD is to disclose information that the FTC deems pertinent to a potential franchisee. The content includes a combination of lists, tables, data, rules, regulations and guidelines. The format of the document is dictated by the FTC, as are the layouts used in each of the 23 'items' that make up the document.
Some of the information in the FDD is relatively straightforward and easy to understand while other sections can be detailed and complex. The length and the breadth of the document can be daunting, so it is very useful to understand its structure prior to delving in!
An FDD is made up of three important components:
1. Corporate Information – Including information about the corporation, its history, its officers and its audited financial statements.
2. Disclosure - The disclosures are the heart of the FDD. Some of the disclosures are of particular interest to a potential franchise owner:
3. Franchise Agreement - A copy of the current franchise agreement is included in the FDD. This is the document that you will ultimately sign if you and the franchise leadership decide to move forward together.
Each of the 23 'items' in the FDD is relevant to the decision making process. Becoming familiar with the content of each item is recommended, even if you are only at the initial stages of evaluation.
As you approach your final decision, it is advisable to hire a franchise attorney (an attorney specially trained in franchise law) to review this document, and the franchise agreement on your behalf.
