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What is the Franchise Disclosure Document (FDD) and Why is it Helpful?

Posted by Ashlan Bonnell

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Nov 6, 2014 12:22:00 PM

Today we hear from one of our publishing partners and the focus is on franchises and how market research can protect and inform the frachisee.

The Franchise Disclosure Document (FDD) was previously recognized as the Uniform Franchise Offering Circular (UFOC) and, due to some revisions made by the Federal Trade Commission in the July of 2007, its name was changed and a legal document was created for the benefit of franchisees.

The Federal Trade Commission supervises franchise transactions and it lies within their jurisdiction to ensure that the franchisor in certain states provides the possible franchisee with certain information beforehand so as to ensure some manner of security to the franchisee. Due to some unethical behavior in the 1960s and 1970s, franchisors used their influential market position to hide certain information and franchisees unknowingly fell prey to these franchisors and went into harmful relations. To ensure that the franchisees knowingly enter into an agreement, the Federal Trade Commission made it mandatory for franchisors to submit a UFOC, later FDD, a document with certain information regarding the operations of the franchise.

The Federal Trade Commission makes it necessary for franchisors all across the country to provide prospective franchisees with the FDD prior to any monetary exchange or signing of agreements. However, in certain states it is also required by law that the franchisor must first be approved and registered by the state before it can be promoted to prospective franchise buyers.

Items present in the FDD
The FDD contains extensive information about the franchisor and the franchise organization as well. The information contained within the document is meant to give the franchisee enough knowledge about the organization so that they may make an informed decision when choosing a franchise.
The Items enclosed within the FDD are:
  1. The Franchisor, It’s Predecessors and Affiliates
  2. Business Experience
  3. Litigation
  4. Bankruptcy
  5. Initial Franchise Fee
  6. Other Fees
  7. Initial Investment
  8. Restrictions on Sources of Products and Services
  9. Franchisee’s Obligations
  10. Financing
  11. Franchisor’s Obligations
  12. Territory
  13. Trademarks
  14. Patents, Copyrights and Proprietary Information
  15. Obligation to Participate in the Actual Operation of the Franchise Business
  16. Restrictions on What the Franchisee May Sell
  17. Renewal, Termination, Transfer and Dispute Resolution
  18. Public Figures
  19. Earnings Claims
  20. List of Outlets
  21. Financial Statements
  22. Contracts
  23. Receipt
How to use the FDD
The FDD is very similar to a securities prospectus. The information contained within it provides the prospective franchisee with the means to evaluate a company and to make an educated selection of a franchise opportunity based on his/her own investment position. People who can best benefit from the FDD include: Potential franchisees, potential franchisors, franchisors, investors, financial companies, and suppliers to franchisees.  Potential franchisees should use the FDD to conduct their due diligence and to compare different franchise opportunities before investing in a franchise.

Follow this link to obtain more information on the FDD available for various franchises.

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