If you are seriously interested in buying a franchise, at some point you will receive and re-read a franchise disclosure document (FDD). The purpose of the FDD is to provide the potential acquirer with detailed information on the details of the investment, commissions and ongoing obligations of both the franchisor and the franchisee. According to federal law, regulated by the Federal Trade Commission (FTC), you must receive a copy of the FDD at least 14 days before signing any agreement with the deductible.
The FDD offers an overview of:
– Management structure and franchising history
– Experience of key personnel
– History of the litigation
– The initial investment and current expenses
– Obligations of all the parties
– List of current and previous franchisees
– Trademarks, patents and copyrights
– Details on training and support
– Financial performance (if the franchise chosen to provide)
– The franchise agreement
The FDD format is standard and contains 23 articles. Each article provides specific details on the franchise opportunity. This document is typically drafted by a lawyer and will contain many legal phrases and definitions. You should have a franchise lawyer review the document as they can help explain what is disclosed and, most importantly, negotiate the franchise contract. Some of the more experienced franchise systems do not negotiate the document. In any case, you will want to understand what you are signing to be aware of the risks and obligations of the franchise agreement.
Here is an overview of each article:
Article 1. Franchisor and Any Parents, Predecessors and Affiliates: this section explains the history of the franchise.
Article 2. Identity and commercial experience of the key persons managing the franchise.
Article 3. Litigation history & ndash; Details of any pending causes
Article 4. History of bankruptcy & ndash; Details of any franchise bankruptcy history
Article 5. Initial commissions & ndash; Franchise Fee and any other commission requested at the time of signing the contract.
Article 6. Other commissions and expenses & ndash; Details on ongoing royalty, advertising and any other current charges.
Article 7. Initial investment: an estimate of the initial investment to start the business
Article 8. Limitations on the sources of products and services
Article 9. Obligations of the Franchisee
Article 10. Financing agreements & ndash; Details of the loan granted in franchising.
Article 11. Obligations of the Franchisor
Article 12. Territory & ndash; Details of the territory assigned and what protections are provided.
Article 13. Commercial trademarks Details on franchised brands.
Article 14. Patents, copyrights and property information
Article 15. Obligation to participate in the effective operation of the business & ndash; Details on how much time is needed to manage the activity.
Article 16. Restrictions on goods and services offered by the franchisee
Point 17. Renewal, resolution, repurchase, modification and / or transfer of the franchise agreement and settlement of disputes
Point 18. Public figures & ndash; They are their public figures who approve the franchise.
Item 19. Representations of financial performance (FPR or profit statement) & ndash; Details of the financial performance of the model. Franchises can choose NOT to do an FPR.
Article 20. List of franchised points of sale & ndash; Number of current franchise positions and the number that entered or left the franchise.
Item 21. Budget of the Franchisor
Article 22. Contract & ndash; The franchise agreement
Article 23. Recognition of the receipt
The FDD is only part of your due diligence process. When considering franchised ownership there are several elements to consider. Will the deductible work in your market, Do you have the possibility to own and manage the activity, Is activity vital, You will be happy to own and manage the business and adapt to your ideal lifestyle. When considering a franchise investment, it is advisable to do so with a qualified franchise lawyer, CPA and financial advisor. It can help you perform due diligence, determine eligibility and formulate a financing strategy.