What is an FDD?
Franchise disclosure documents were created by the Federal Trade Commission (FTC) to help potential franchise owners gather the information they need to conclude whether they’re making a good investment or not. These documents are meant to protect American consumers and guide them as they search for the right investments to meet their needs. At first glance, a franchise may seem like a good investment, but it’s never a good idea to make such a big financial decision without digging a bit deeper first. Your franchise disclosure document will provide you with details on everything from affiliated companies to dispute resolution requirements.
Why is it Required?
This legal document is an important part of doing your pre-purchase due diligence. The information contained in a franchise disclosure document is essential to potential franchisees who are preparing to make one of the most significant investments possible. In your disclosure document, you’ll read about the roles of each party involved, among many other things. Knowing what falls on the franchisor and the franchisee will help you make a diligent and informed decision. Providing this information is also beneficial to the franchisor, as they now have their legal obligations and promises in writing should a conflict appear later on in the business relationship.
The Federal Trade Commission requires that franchisors provide the document to the franchisee a minimum of 14 days prior to it being signed, or before any money changes hands. This means that the start-up costs and annual licensing fee will be handled after the document is signed. This may seem like a lengthy period of time, but this document contains a lot of information, and you should take your time reviewing it section by section. Once you’ve reviewed and signed, keeping a copy of important documents like these for your records is always a good practice. It may be helpful to refer back to them later.
Why is it Important to Potential Franchise Owners?
When we were young, inexperienced students, we all learned how to make pro-con lists when we were making important decisions. Franchise disclosure documents are essentially the adult version of this useful organizational tool, except they’re put together by someone who already has all of the information we need. Potential franchise owners can use a federal disclosure document to weigh the risks and benefits of the investment they’re considering so they’re not walking blindly into a situation that may not work out for them.
When you’re teaming up with a franchise to access their business knowledge, established processes, trademarks, and more, it’s important to know exactly what you’re getting. You’ll need to know which obligations fall to which party, and whether they’ll help you with things like finding the right location, training your team, management guidance, and marketing strategies. Franchises are unique investments in many different ways. For this reason, it’s important to weigh the pros and cons, or risks and rewards, before you enter into this important business decision.
What is Included in an FDD?
Franchise disclosure documents contain 23 specific pieces of information about the franchise you’re looking into, the franchise’s officers, and other existing franchisees. This is an incredibly thorough and important document involved in any franchise purchase. It’s also long, and if this is your first franchise purchase, maybe a bit confusing. It may be a good idea to go through your franchise disclosure document under the guidance and watchful eye of an experienced franchise attorney before you sign.
Below is a breakdown of the items that will be included in your franchise disclosure document, what they are, and why they’re important:
1. The franchisor and any parents, predecessors, and affiliates
All corporate, affiliation and parent company information related to the franchisor should be included here
2. Business experience
Information regarding the franchisor’s management team
If the franchisor, affiliates, predecessors, or management team members are involved in certain kinds of litigation, that information should be disclosed here
If any of the parties listed above previously filed for bankruptcy, that would be contained in this section
5. Initial fees
Having a clear outline of both initial and other fees will help both parties avoid disputes over undisclosed costs down the road
6. Other fees
Same as above
7. Estimated initial investment
This section of your franchise disclosure document should give you a range for the expected initial investment needed to get your franchise up and running
8. Restrictions on sources of products and services
This section includes a list of products or supplies that the franchisee needs to buy from the franchisor (or suppliers that they designate). It also included information on revenue and rebates that they earn from this
9. Franchisee’s obligations
As a franchisee, your obligations (legal, termination, etc.) will be listed in a table here
If your franchisor offers their franchisees financing for initial or other fees, you’ll find that information here
11. Franchisor’s assistance, advertising, computer systems, and training
This section will list the types of assistance or training you’ll have access to, advertising requirements, and the systems you’ll need to buy and use within the franchise
Your franchisor will disclose whether you have access to a protected territory, how that’s determined, and situations that will allow them to operate within your territory
If your franchisor has trademarks, they’ll include registration (with the U.S. Patent and Trademark Office) information, status, and related details here
14. Patents, copyrights, and proprietary information
Similar to the section above, here your franchisor will include information on any applicable patents, copyrights, or other proprietary information you may need
15. Obligation to participate in the actual operation of the franchise business
If you are obligated to have any involvement in the daily operations of your franchise, your franchisor will provide the details of that obligation here. Some may require that you work in the franchise full-time, while others have no requirements listed in this section
16. Restrictions on what the franchisee may sell
Your franchisor may limit what you can or can’t sell here
17. Renewal, termination, transfer, and dispute resolution
Your legal rights, renewal obligations, termination process, and transfer details, along with a summary of dispute resolution requirements between you and your franchisor will be listed in this section
18. Public figures
Lists celebrities and public figures (if any) that were hired to promote the franchise
19. Financial performance representations
Outlines information about sales or other financial data. This is not always provided
20. Outlets and franchisee information
A table will be used here to summarize things like the number of opened franchises, the number of franchises that were terminated, closed, or transferred, and contact information for each franchisee in the franchisor’s system
21. Financial statements
Financial statements are one of the most important inclusions in any federal disclosure document. Your franchisor will need to provide three years’ worth of audited financial statements. This will give you insight into costs and cash flow, among other things
Buying a franchise includes signing several contracts, like your franchise agreement. Others may include financial contracts, agreements made regarding products supplied, licensing agreements, and more
The last section of your franchise disclosure document is a receipt page that you’ll sign to let the appropriate parties know (and keep a record of) when you received your FDD
About Corvus Janitorial Systems
Founded in 2004 to make people’s lives better, Corvus is a full-service commercial cleaning franchisor that offers cleaning services through reputable local Franchisees. Corvus has been guided by its mission to transform people and transform places by consistently delivering independence, security, and freedom to Franchisees who deliver high-quality cleaning to offices, educational buildings, medical buildings/offices, recreational centers, industrial parks, and other spaces. Visit our website for more information regarding Corvus and the franchise opportunities we offer nationwide.
Disclaimer: This blog is for general information only. It is not intended to advise an individual on their purchase of a franchise and should not be used in place of legal counsel. There are many factors that affect the purchase of a franchise. Any person considering the purchase of a franchise should become familiar with their state laws related to franchising.