Franchise Fundamentals: Understanding Each Item In the FDD
The Legal Contents of Each Franchise Disclosure Document (FDD)
Franchises are offered and sold in the United States through preparation and disclosure of a legal packet known as the franchise disclosure document, or the FDD for short.
Each FDD contains unique content tailored to the franchisor and franchise opportunity, but the rules are the same for all franchisors.
What is the Purpose of an FDD?
The FDD is designed to provide the prospective buyer with key information before you make a significant investment of time and capital.
What is Included in the FDD?
Each FDD starts with a cover page, two required federal pages about using the document and franchising generally, and a state cover page highlighting certain risks about the franchisor. Next, each FDD contains 23 substantive “Items”, which are intended to provide information about a particular subject or related group of subjects relating to the franchisor and the purchase and operation of a franchised business.
A Roadmap Of Each FDD Items
Each Item serves a distinct purpose.
- Items 1 through 4 provide information about the franchisor.
- Items 5 through 10 provide information about the funds a franchisee will be required to spend to purchase, build, and operate a franchised business.
- Items 11 through 16 provide information about the franchisee and franchisor relationship.
- Item 17 summarizes details like the term length, renewal, and events leading to termination, your rights to sell the franchise, restrictive covenants limiting your ability to operate another business, and the dispute resolution process.
- Item 18 discloses if there are any public figures involved in franchise sales.
- Item 19 addresses the all-important subject of financial performance representations – this is where you will find any earnings claims about company or franchised outlets.
- Item 20 contains 5 tables detailing the historic growth or contraction of the franchise network, and also provides contact information for existing franchisees and certain franchisees who have recently left the system (typically as an exhibit).
- Item 21 provides financial information – typically in the form of an audit report of the last 3 fiscal years.
- Item 22 identifies each contract (as an exhibit).
- Item 23 is a receipt form used to document simply confirms that your received the full contents of the FDD.
A Deep Dive Into Each FDD Item
You can also learn more about specific risk factors identified in the cover pages of each FDD.
Have questions about a particular FDD Item? Explore our site to learn more about each franchise item:
- The Franchisor and Any Parents, Predecessors and Affiliates
- Business Experience
- Litigation
- Bankruptcy
- Initial Fees
- Other Fees
- Estimated Initial Investment
- Restrictions on Sources of Products and Services
- Franchisee’s Obligations
- Financing
- Franchisor’s Assistance, Advertising, Computer Systems and Training
- Territory
- Trademarks
- Patents, Copyrights and Proprietary Information
- Obligation to Participate in the Actual Operation of the Franchise Business
- Restrictions on What the Franchisee May Sell
- Renewal, Termination, Transfer and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Outlets and Franchisee Information
- Financial Statements
- Contracts
- Receipts
