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What Is a Franchise Disclosure Document (FDD)?

By Thomas Scott

If you're considering investing in a franchise, one of the first things you'll want to do is familiarize yourself with the industry's most essential document — the Franchise Disclosure Document (FDD). Learn what this document is and why it's so important.

FDD Basics

In response to unregulated and unscrupulous business practices involving the sale of franchises, the Federal Trade Commission (FTC) instituted the FTC Rule in 1978. As a result, every franchisor is obligated to present a potential buyer (franchisee) with an FDD, which provides accurately validated information about the background of the business, so the franchisee can make an educated decision.

The FDD information must be updated annually, and the franchisor is required to provide the potential franchisee with the information at least two weeks prior to the sale. The purpose of the FDD is to protect both the franchisee from receiving misleading information and the franchisor from unwarranted allegations of unscrupulous business tactics.

Franchisor History

Each of the 23 sections on an FDD is referred to as an item. Each item answers a specific question. 

These following items provide critical background information on the franchisor. This is where you should look specifically at experience and resumes as well as any type of litigation.

Key items disclose not only the franchisor's history but also that of any affiliates, predecessors, or parent companies. They include bankruptcies or litigations that might have occurred during the previous 10 years. You should also receive information regarding the founder and management team's experience in addition to the business' operational history.

  • Item 1: Outlines the franchisor's history as well as any affiliates, predecessors, or parent companies.
  • Item 2: Provides professional and biographical experience of the founder, executives, officers, and directors as well as the operational history of the business itself.
  • Item 3: Covers a 10-year history that includes all litigation.
  • Item 4: The franchisor's or its founder's bankruptcies are disclosed here.
  • Item 13: The franchisor's trademarks, service, and trade names are outlined.
  • Item 18: Any use of celebrities or public figures the franchisor uses for promotional purposes and how much their paid is revealed in this item.
  • Item 20: Details all contact information and locations for existing franchises.
  • Item 21: Discloses 3 years' worth of audited financial statements.

Franchise Cost

Two of the biggest concerns that the franchisee has about investing in a potential business is what it costs and its potential profit. The FDD needs to cover the entire scope of these questions. Luckily, it discusses your total investment in order to become a franchisee.

Here are the items to consider when it comes to cost.

  • Item 5: The initial fees associated with becoming a franchisee are detailed here. They include the franchise and any required supplies or materials.
  • Item 6: Details ongoing fees. That might include royalty, renewal fees, marketing fees, technology fees, or any other fee required by the franchisor.
  • Item 7: This item includes the initial fees discussed in item 5 and includes any other initial investment costs to arrive at the total initial investment. Some of what you may find in this item includes construction or improvement costs, fixtures, signage, equipment, furniture, rental deposits, professional fees, and insurance deposits.
  • Item 10: Any financing offered by the franchisor as well as the terms and conditions are outlined in this section.

Franchise Support

People seek to buy into a specific franchise because of its brand awareness and for the potential support they'll receive as a franchisee. The basis for continued royalty payments hinges on that brand awareness as well as on the consistency and quality of the support they receive.

  • Item 8: Discusses operational costs as well as suppliers.
  • Item 11: Details any ongoing training and assistance the franchisee should expect.
  • Item 12: Outlines what the franchisor considers a territory and how the franchisee is protected.
  • Item 14: Discussion of copyrights and intellectual property are detailed in this section.
  • Item 17: Topics that cover renewal fees, dispute resolution, cause for termination, and transfer options.

Franchisee Obligations

These are the rules that govern the franchisee once the agreement is signed. The following items cover these franchisee obligations.

  • Item 8: Details about sourcing restrictions that include both materials and products are covered in this section.
  • Item 9: The franchisee's specific obligations should be clearly outlined.
  • Item 15: Details the franchisor's expectations of your personal involvement as a business owner.
  • Item 16: Any restrictions imposed on the franchisee regarding what goods and services said franchisee may offer customers.
  • Item 22: All agreements the franchisee is required to sign are outlined within this item.
  • Item 23: The prospective franchisee is required to sign a receipt that they received the FDD.

Economic Expectations

You will find what the franchisor deems important in regard to the financial information and performance of the franchise system. While this item is not required, it is necessary information for the franchisor to include to provide earnings information or claims.

  • Item 19: Includes the financial information about the performance of the franchise system.

Consider a Caring Senior Service Franchise

If you're investigating the potential of becoming part of a team while operating as your own boss, consider the benefits of becoming a Caring Senior Service franchisee.

Our GreatCare method utilizes our 25 years of experience to provide uniformity among all of our franchises so that we can offer quality caregivers, care solutions, and active involvement.

We value the opportunity to provide our prospective franchisees with as much knowledge as we can about the exciting opportunities available to each of the business owners operating under Caring Senior Service.

We fully disclose initial start-up costs, so you are immediately aware of your financial commitment. While it's an affordable business plan, we don't want you to feel like you were caught off guard by unexpected costs.

Our commitment to our franchisees includes providing a proprietary technology system that keeps you well organized and aware of your expenditures and profits.

We are also wholly committed to your success, which is why we deliver unparalleled support and training that continues beyond your initial training courses. We cover the senior care market, operational systems, and our specific software and intranet.

If you have any questions or would like more information about the possibility of becoming a Caring Senior Service franchisee, don't hesitate to contact us.

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Tags: Franchise Ownership, Why Caring