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What Is a Franchise Disclosure Document (FDD)?

By Thomas Scott

If you're considering investing in a franchise, you'll want to be familiar with the industry's most essential document: the Franchise Disclosure Document (FDD). This document is different, but equally as important as, the franchise agreement. Learn what this document is and why it's so important.

FDD Basics

The Federal Trade Commission (FTC) instituted the FDD in 1978 in response to unregulated and unscrupulous business practices in franchising. The FTC implemented the FDD to protect franchisees from receiving misleading information. Today, every franchisor must provide a potential buyer with an FDD at least 14 days prior to the sale.

The FDD provides accurate and validated information about the background of the business, so the franchisee can make an educated decision. The franchisor must updated the FDD information annually. Additionally, it protects the franchisor from unwarranted allegations of unscrupulous business tactics.

Franchisor History

The FDD contains 23 sections, referred to as items. Each item answers a specific question. The 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 personal experience of the founder, executives, officers, and directors. Includes the operational history of the business itself.
  • Item 3: Covers a 10-year history that includes all litigation.
  • Item 4: Discloses the franchisor's or its founder's bankruptcies
  • Item 13: Outlines the franchisor's trademarks, service, and trade names.
  • Item 18: Reveals any use of celebrities or public figures the franchisor uses for promotional purposes and how much their paid.
  • 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 cost and 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: Details the initial fees associated with becoming a franchisee. Includes the franchise and any required supplies or materials.
  • Item 6: Details ongoing fees, which might include royalty, renewal fees, marketing fees, technology fees, etc.
  • Item 7: Builds on the fees discussed in Item 5. Reviews initial investment costs to arrive at the total initial investment. Costs may include construction or improvement costs, fixtures, signage, equipment, furniture, rental deposits, professional fees, and insurance deposits.
  • Item 10: Outlines any financing offered by the franchisor as well as the terms and conditions.

Franchise Support

People often buy into a specific franchise because of the support they'll receive as a franchisee. The basis for continued royalty payments hinges on the consistency and quality of the support they receive. Below are some items in the franchise disclosure document related to franchise support.

  • 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 franchisee protections.
  • Item 14: Details copyrights and proprietary information.
  • Item 17: Covers renewal fees, dispute resolution, cause for termination, and transfer options.

Franchisee Obligations

After a franchisee signs a franchise agreement, they must adhere to certain franchise rules. The FDD outlines these obligations so new owners know exactly what their standard will be.

  • Item 8: Details sourcing restrictions, including materials, products, and services.
  • Item 9: Outlines the franchisee's specific obligations clearly.
  • Item 15: Details the franchisor's expectations of your personal involvement as a business owner.
  • Item 16: Reveals any restrictions imposed on the franchisee regarding what goods and services a franchisee may sell.
  • Item 22: Describes all of the agreements that the franchisee must to sign.
  • Item 23: Reinforces that the prospective franchisee must 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.

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

Note that the FTC does not require Item 19. However, it can provide important information on earnings or claims.

Consider a Caring Senior Service Franchise

If you're considering joining a franchise, make sure you review Caring Senior Service. For over 30. years, we have refined our GreatCare method of delivering care, providing you with a successful business framework. This model revolves around quality caregivers, care solutions, and active involvement.

We value the opportunity to provide our prospective franchisees with as much knowledge as we can about becoming a Caring franchisee. 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 caught off guard.

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. That's why we deliver unparalleled support and training on the operation of the franchise 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 to review our FDD, don't hesitate to contact us.

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Tags: Franchise Ownership, Why Caring