October 8, 2024
Franchise Disclosure Document (FDD): A Guide to It’s 23 Items
When entering into the franchising industry, it is critical to know the key documents that help protect both the franchisor and the franchisee. The Franchise Disclosure Document (FDD) provides essential details about the franchise opportunity, helping prospective franchisees make informed decisions.
As an emerging franchisor, when starting the process of franchising your business, creating this document is one of the first steps to take. In SMB Franchise Advisors’ support to launch a brand into franchising, we help founders with the research, due diligence, and competitive analysis needed for a best in class FDD.
Below is a breakdown of the 23 items that must be included in the FDD.
- Franchisor and Affiliates: This section details the franchisor’s history, including ownership, business experience, and any affiliated companies.
- Business Experience: Describes the background of key franchisor executives, highlighting their experience and roles in the business.
- Litigation History: Lists past and ongoing legal disputes involving the franchisor or its key executives.
- Bankruptcy: Discloses any bankruptcy filings by the franchisor or key figures within the company.
- Initial Fees: Outlines upfront costs, such as franchise fees and any other fees required to start the business.
- Other Fees: Details ongoing fees, including royalties, advertising fees, and other payments the franchisee will owe after opening.
- Estimated Initial Investment: Provides a range of the total costs required to start the franchise, including equipment, real estate, and training expenses.
- Restrictions on Sources of Products and Services: Specifies if the franchisee is required to purchase certain goods or services from specific suppliers.
- Franchisee’s Obligations: Describes the responsibilities of the franchisee, from operational standards to marketing and site selection.
- Financing: Indicates whether the franchisor offers financing options or has relationships with third-party lenders.
- Franchisor’s Assistance, Advertising, Computer Systems, and Training: Explains the training, marketing support, and required technology the franchisor provides.
- Territory: Details any geographical restrictions or exclusivity rights the franchisee will have.
- Trademarks: Covers the franchisor’s trademarks, service marks, and the franchisee’s rights to use them.
- Patents, Copyrights, and Proprietary Information: Explains any intellectual property protection and how it benefits the franchise.
- Obligation to Participate in the Actual Operation of the Franchise Business: States whether the franchisee must personally manage the franchise or can hire others to do so.
- Restrictions on What the Franchisee May Sell: Lists any limitations on the products or services the franchisee is allowed to offer.
- Renewal, Termination, Transfer, and Dispute Resolution: Discusses the terms of the franchise agreement’s renewal, transfer, or termination, as well as methods for resolving disputes.
- Public Figures: Discloses if any public figure is involved in the franchise, including endorsements or ownership stakes.
- Financial Performance Representation: If provided, this section offers prior financial performance of the brand’s operating units providing insight into potential revenue.
- List of Franchise Outlets: A list of all current franchisees, including contact information, allowing prospective franchisees to ask about their experiences.
- Financial Statements: Presents the franchisor’s audited financial statements, showing its fiscal health.
- Contracts: Includes copies of all contracts the franchisee must sign, such as the franchise agreement and lease agreements.
- Receipt: Acknowledgement confirming that the FDD has been received by a candidate.
These 23 items aim to protect franchisees by offering a full view of the franchisor’s business operations and expectations.
If you need assistance creating, reviewing, or renewing your Franchise Disclosure Document, the SMB team is here to help. We work in conjunction with you and your legal team to set your franchise up for the next stage of growth. SMB guides you through the process as your advisor so your FDD and Franchise Agreement meet all legal and industry standards. Reach out to SMB Franchise Advisors today to get started!
