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What makes a good franchise disclosure document?

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A franchise disclosure document (FDD) is a legal document that franchisors must provide to prospective franchisees before they sign a franchise agreement. It contains important information about the franchisor, the franchise system, the fees, the obligations, the risks, and the performance of the franchise. A good FDD should be clear, accurate, comprehensive, and compliant with the relevant laws and regulations. Here are some key elements of a good FDD and why they matter.

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Mohamed Ragab

Country Manager at Galadari Brothers Group

1 The franchisor and its affiliates

This section introduces the franchisor and its affiliates, such as parent companies, subsidiaries, or partners. It also discloses the business experience, background, and litigation history of the franchisor and its executives. This section helps you understand who you are dealing with and whether they have the expertise, reputation, and financial stability to support you as a franchisee.

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Mohamed Ragab

Country Manager at Galadari Brothers Group
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A good franchise disclosure document (FDD) should provide comprehensive and transparent information to potential franchisees. such as 1. Clear and Detailed Information 2. Franchise Fees and Costs: The FDD should disclose all fees that franchisees are required to pay, such as initial franchise fees, ongoing royalties, advertising fees, and any additional costs. 3. Franchisor Support and Training: The FDD should outline the support and training programs offered by the franchisor to help franchisees succeed

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2 The franchise opportunity

This section describes the franchise concept, the market, the competition, the unique selling proposition, and the trademarks of the franchise. It also explains the franchise agreement, the term, the renewal, the termination, and the transfer options. This section helps you evaluate the franchise opportunity and whether it matches your goals, interests, and skills.

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3 The fees and expenses

This section outlines the initial and ongoing fees and expenses that you will have to pay as a franchisee. These include the franchise fee, the royalty fee, the advertising fee, the training fee, the equipment fee, the inventory fee, and the rent. It also estimates the total initial investment that you will need to start the franchise. This section helps you budget and plan your finances and compare different franchise options.

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4 The obligations and restrictions

This section details the obligations and restrictions that you and the franchisor have to each other. These include the training, the support, the quality standards, the operating procedures, the reporting, the audits, the territorial rights, the exclusivity, the non-compete, and the dispute resolution clauses. This section helps you understand your rights and responsibilities as a franchisee and the level of control and flexibility that you have.

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5 The risks and disclosures

This section discloses the risks and challenges that you may face as a franchisee. These include the market conditions, the consumer demand, the competition, the regulation, the liability, the litigation, the bankruptcy, the franchisor's changes, and the renewal or termination of the franchise agreement. It also provides any financial performance representations or earnings claims that the franchisor may make, along with their assumptions and limitations. This section helps you assess the potential profitability and viability of the franchise and whether you can handle the uncertainties and difficulties.

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6 The contacts and references

This section provides the contact information of the franchisor and its agents, as well as a list of current and former franchisees that you can contact for more information. It also includes any audited financial statements, contracts, receipts, or other exhibits that support the information in the FDD. This section helps you verify the accuracy and completeness of the FDD and get feedback and advice from other franchisees.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Steven T. Keppler

Commercial Litigator focusing on contract disputes, business torts and regulatory compliance, Construction and Franchise Law; LEGO Enthusiast. All views expressed are my own.
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Item 19 disclosures are critical to analyze when considering a franchise opportunity. The FTC (and several states) strictly regulate what can, and cannot, be disclosed in the FDD. Prospective franchisees should also be on the lookout for financial performance representations (FPR) made in sales meetings and discovery day presentations, as well as handouts and other promotional materials. Any FPR made outside the FDD's regulated disclosure is likely an illegal FPR under the Amended Franchise Rule and various state regulatory schemes.

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What makes a good franchise disclosure document?

1

2

3

4

5

6

7

1 The franchisor and its affiliates

2 The franchise opportunity

3 The fees and expenses

4 The obligations and restrictions

5 The risks and disclosures

6 The contacts and references

7 Here’s what else to consider

Franchising

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What makes a good franchise disclosure document?

1

2

3

4

5

6

7

1 The franchisor and its affiliates

2 The franchise opportunity

3 The fees and expenses

4 The obligations and restrictions

5 The risks and disclosures

6 The contacts and references

7 Here’s what else to consider

Franchising

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