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Pepin Valley Consulting                                                                                                                                                                                  The Franchising Specialist 

 

Franchising Disclosure Document (FDD)

                                                                                                                                                                                                      By  Bob Hebert

 

By now in the franchising process you should have a pretty good feel for what the company does.  Hopefully you have visited their website, the company has sent you some literature on what they are about and you have talked to a representative from the company to get a good general understanding about them.  On the other side, the company should have gotten more information from you by now and is in a position to start seriously considering if it will award you a franchise.

You can now “see yourself” as an owner of this franchise but before you move forward you need more information as to the nuts and bolts of the operation.  This is where the FDD comes into play. 

What is a FDD?

The FDD, or Franchising Disclosure Document is a document containing detailed information about a franchisor to a potential buyer.  In accordance with the Federal Trade Commission each franchisor must have a FDD and all are similar in format.  The FDD’s contents are designed to assist you in analyzing the merits of a potential franchise and should be used to evaluate the company in a manner similar to a stock prospectus.  It is a powerful tool and will go a long way in helping you to determine if a franchising opportunity is right for you.  In this document, among other things, are complete disclosures on all the fees you will pay, financial statements and lists of current and former franchise owners.  It is written in plain english and I recommend you read through it a couple of times yourself.  I also recommend that you have a qualified accountant and attorney review the FDD on your behalf.

A brief description of the contents in a FDD is as follows:

  1. The franchisor and any predecessor. This section contains historical background material on the franchisor, as well as any predecessors. It includes corporate and trade names, address and principal place of business.  
  2. Identity and business experience of persons affiliated with the franchisor. All names of individuals having significant responsibilities in the operation of the business or in support services provided to the franchisees must be disclosed. Information stating the person’s current position in the company and business experience for the last five years is also included.  This section tells you who you will be going into business with.
  3. Litigation history. Detailed information on criminal, civil and administrative litigation involving any of the officers, owners, directors or key executives of the company or parent company if applicable is disclosed in this section if the allegations or proceedings would concern the potential franchisee.
  4. Bankruptcy history. The franchisor must disclose whether the company or any of its directors or officers has filed for bankruptcy during the past 15 years.
  5. Franchisee's initial franchise fee and/ or other initial payment. This section states the franchise fee and any other initial payments to be made by the franchisee upon the execution of the franchise agreement. The section discloses the terms of payment and fees, the use of such monies, and whether the payment and fees are refundable in whole or in part.
  6. Other fees. All other fees are detailed, including royalties, advertising fees, insurance expenses, training costs, audit and accounting cost, consulting, leases, alteration costs and any other fees associated with the franchise.
  7. Franchisee's estimated initial investment. The estimated expenditures associated with the opening of a franchise are recounted with a high and low range given for real estate, construction, equipment, fixtures, permits, furnishings, signage, inventory, working capital, etc. This section should include the name of the person or persons to whom payment is made for the preceding, under what terms and whether refund terms apply.
  8. Obligations of franchisee to purchase or lease from designated sources. Any requirements that the franchisee must purchase goods, services, supplies, equipment or insurance for the opening and/or operation of the franchise from a franchisor-designated source must be disclosed. Franchisors must also disclose if they receive income from the approved suppliers as a result of purchases by franchisees.
  9. Obligations of franchisee to purchase or lease in accordance with specifications or from approved suppliers. A further elaboration on supply sourcing, this section itemizes any responsibility of the franchisee to purchase or lease either from pre-approved suppliers or according to franchisor specifications. Specifications for purchases are not normally included, but pricing, discounts and procedures to have suppliers approved by the franchisor are usually cited.
  10. Financing arrangements. Any financing programs that are offered either by the franchisor or its designates are described in this section.
  11. Obligations of franchisor: other supervision, assistance or services. This section describes the initial and on-going services and support of the franchisor. Often it is divided into two parts -- service obligations of the franchisor and services that may be performed by the franchisor. Some types of service and support described are training, advertising material, site selection, market research and computer services.
  12. Territorial rights. If the franchisor grants exclusive rights, the territory and the rights will be described in this section. Any conditions that the franchisee must meet to retain these rights, as well as the right of the franchisor, are also disclosed.
  13. Trademarks, service marks, trade names, logo types and commercial symbols. The franchisor must disclose information regarding the registration of trademarks, service marks, trade names, logo types and commercial symbols.
  14. Patents and copyrights. This disclosure lists any patents and copyrights that may be involved in the operation of the franchise and that may cover trade secrets and confidential information.
  15. Obligation of the franchisee to participate in the operation of the franchise business. If the franchisor requires the active participation of the franchisee in the operation of the business, it must be so stated. Terms and conditions of the participation should be defined.
  16. Restrictions on goods and services offered by franchisee. Any limits or exclusions on goods and services that can be commercialized by the franchisee are stated in this section.
  17. Renewal, termination, repurchases modification and assignment of the franchise agreement and related information. This, the longest and most complex section, covers the franchisor's requirements and the franchisee's options when a franchise is to be renewed, terminated, repurchased, modified or assigned.  Also covers litigation, arbitration and mediation.
  18. Arrangements with public figures. If the franchisor has any compensation or endorsement program with a public figure, or if the public figure is involved in the ownership or the management of the franchise, it must also be disclosed.
  19. Financial performance representation. There is an option here. Some franchisors will state that they do not furnish the actual, average, projected or forecasted sales and earnings to prospective franchisees. If a franchisor does make a claim of sales, profits or earnings, then the franchisor must fully describe the method by which the claim is made.
  20. Information regarding franchises of the franchisor. The franchisor provides a summary of franchises sold, the number operating, the number of agreements signed but not in operation, and the number of company-owned units. Information on the number of franchises terminated or not renewed for the past year is also included.
  21. Financial statements. In this section there is a complete set of financial statements of the franchisor and any parent companies, usually a balance sheet for the past fiscal year, an income statement and changes in the financial position of the franchisor for the most recent three fiscal years. Most states require audited statements.
  22. Franchise agreement and related documents. A copy of the franchise document and any other document to be signed by the franchisee must be included as exhibits.
  23. Acknowledgement of receipt by a prospective franchise. Prospective franchisees are required to sign an acknowledgement that a disclosure document was received from the franchisor.

 

Pepin Valley Consulting