The number of new franchise businesses continues to increase in the United States, and some people believe that the benefits of ownership are an important reason for this. When you’re trying to expand your own IP or build someone else’s, you’ll want to know what the details are behind franchise law.
If you have been considering joining a franchise, you will want to do your research. You should also familiarize yourself with the importance of an FDD and what it means to a potential franchisee.
What Is an FDD?
An FDD is a franchise-disclosure document that is given to the prospective franchise buyer. The FDD is a legal document, and it is mandatory that it is provided to a franchise buyer in the United States. Previously referred to as the Uniform Franchise Offering Circular (UFOC), it was renamed in 2007. This came as a result of changes to the document that were made by the Federal Trade Commission (FTC).
The FDD Protects the Buyer
As explained by Franchise Gator, these changes were implemented to protect the prospective buyer and inform them of important information. All franchisors were required to fully comply with these changes by no later than July 1, 2008. It is the FTC that requires the disclosure of essential information in accordance with the FTC Franchise Rule of 1979.
This rule states that the FDD is provided and determines who will be the one to prepare the document. It further governs who must provide this disclosure to all potential buyers and how the prospective franchisee will receive the franchise disclosure documents. The FDD is added to the contract-of-sale agreement. The rule also sets forth the inclusion of how much time a franchisee has to review the franchise disclosure document.
Items in the FDD
An FDD can generally be 100 pages or more. Franchise Times admits that trying to evaluate it can be a challenge. The document lists items such as all fees related to the purchase of the franchise. It also includes the training requirements that a new owner must undergo and information about the history of the franchise.
The FDD also includes information on the management team by name, title, role and their past business and work experience. The disclosure can also include any information, if available, on past or pending litigations involving the franchise. There are other possible topics included in the document.
The FDD has to be made available from the franchisor to the prospective buyer a minimum of 14 days prior to the signing of the franchise agreement. This provides prospective buyers with adequate time to perform their due diligence.