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When most people buy a franchise, they look at the Franchise Disclosure Document (FDD) and believe that everything within that document is their contract with the franchisor. However, this is not the case. It is important to understand the difference between the franchise disclosure document versus the franchise agreement when looking to enter a franchise.
What some do not realize is that the FDD is merely an overview of the franchise relationship and includes the experience of the franchisor and its officers; the litigation and bankruptcy history of the franchisor and its officers; the costs the franchisee candidate can expect to incur in building out and operating the franchise; a history of the franchise itself; and the support that the franchisee can expect to receive. The FDD is not a contract itself, although a franchisor can be held legally liable for its contents if an issue of misrepresentation arises. The FDD contents are dictated by federal and state regulations which have several limitations on what franchisors can and cannot include such as financial representations and disclaimers.
When reading the FDD, a franchisee candidate will find several exhibits which include financial statements for the franchisor, a sample copy of the franchise agreement, other standard contracts that the franchisee may be required to sign, if any, state amendments to the franchise agreement and FDD, and receipts to acknowledge that the franchisee candidate received the FDD.
The franchise agreement, on the other hand, is the actual contract between the franchisor and franchisee. The terms of the franchise agreement are binding between the parties, subject to certain changes by some states and allowable variances through operations manual revisions. Although many portions of the FDD are reflected in the franchise agreement, such as ongoing fees, default and termination provisions, and territory size, the franchise agreement goes further into detail to address the rights, roles and obligations of both the franchisee and franchisor in legal terms.
Additionally, when reviewing the franchise prior to purchasing, a candidate should understand that any changes made will be made exclusively to the franchise agreement, not the FDD. In most cases these changes, if any, are made through an amendment to the franchise agreement and must be signed along with the franchise agreement. If any changes are not made in writing and signed by both franchisee and franchisor, then either side risks these changes not being enforceable.
Because of the differences between the FDD and franchise agreement, we highly recommend having a franchise attorney review both documents thoroughly before purchasing the franchise or launching the franchise brand. If you need assistance, please reach out to our team today.
