Becoming a Franchisee: What is the Franchise Disclosure Document?

Becoming a Franchisee: What is the Franchise Disclosure Document?

a woman entrepreneurWhen thinking of investing in a business, you could opt to start from scratch or go with a proven franchise business model. Let’s say you decided to invest in a Mexican food franchise. A crucial law you need to know is the Franchise Rule of the Federal Trade Commission.

In general, this law requires franchisors to give a Franchise Disclosure Document (FDD) to potential investors like you. Here’s what you need to know about it:

The main purpose of the FDD is to define the relationship between franchisees and franchisors and give potential franchisees relevant information they'd need to understand what the franchisor is offering. As a potential franchisee, you could use the FDD for performing due diligence tasks on the franchise opportunity.

  1. Franchisors could furnish FDDs in any way, including through electronic means. However, they should be in writing.
  2. The franchisor should give you the FDD within a minimum of 14 days prior to signing the franchise agreement or paying the franchisor for a franchise business.
  3. The FDD must have a complete cover page that must follow a particular form and order set out in the Franchise Rule of the Federal Trade Commission.
  4. The FDD must contain details specific to the background information of the franchisor — all the costs associated with investing in the franchise opportunity, the legal responsibilities of the franchisee and franchisor, the audited financial details of the franchisor, the statistics on all existing franchises, and all related material information.

It’s vital to note that aside from the FDD, you'd also receive a Franchise Agreement that you and the franchisor should sign. The franchisor must give the FDD before the final agreement so you could read, understand, and review the relevant information thoroughly prior to deciding whether or not the franchise opportunity is right for you.

Bearing all these in mind, when reviewing these crucial documents, it’s best that you consult an experienced franchise consultant or lawyer to make certain you understand them.

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