What is a Franchise Disclosure Document?

The Franchise Disclosure Document (FDD) is a legal document that the Federal Trade Commission (FTC) requires franchisors to provide to prospective franchisees before selling a franchise. The FDD is divided into twenty-three sections or “Items”, each of which require a franchisor to disclose certain information to assist prospective franchisees in making a well-informed decision before investing in the franchise. This information concerns the franchisor, the individuals and entities associated with the franchisor, the franchise opportunity, the fees charged by the franchisor, the franchisor-franchisee relationship, and other information about the offering. This document can be overwhelming to prepare on your own, so it is important to have a skilled franchise attorney by your side to help you with this process.

How is a Franchise Disclosure Document Structured?

By virtue of the FTC’s Amended Franchise Rule (the “Amended Rule”), which is codified at 16 C.F.R. §436, a franchisor selling a franchise must include all twenty-three Items in its FDD. The purpose of this requirement was to supplant the old timey sale-practices of franchisors, who could play fast and loose with the truth to the detriment of vulnerable prospective franchisees. While the contents of each Item vary with each franchisor, each FDD is required to contain the following Items in this order:

• Item 1: The Franchisor, and any Parents, Predecessors, and Affiliates
• Item 2: Business Experience
• Item 3: Litigation
• Item 4: Bankruptcy
• Item 5: Initial Fees
• Item 6: Other Fees
• Item 7: Estimated Initial Investment
• Item 8: Restrictions on Sources of Products and Services
• Item 9: Franchisee’s Obligations
• Item 10: Financing
• Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
• Item 12: Territory
• Item 13: Trademarks
• Item 14: Patents, Copyrights, and Proprietary Information
• Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
• Item 16: Restrictions on What the Franchisee May Sell
• Item 17: Renewal, Termination, Transfer, and Dispute Resolution
• Item 18: Public Figures
• Item 19: Financial Performance Representations
• Item 20: Outlets and Franchisee Information
• Item 21: Financial Statements
• Item 22: Contracts
• Item 23: Receipts

Additionally, depending on the state the franchise will operate in and the information provided in the FDD, a franchisor is often required to attach certain exhibits to the FDD, such as a copy of the franchise agreement, an attachment setting forth information required by state franchise laws (provided it is not inconsistent with the requirements of the Amended Rule), audited financial statements, and proof that a prospective franchisee received the FDD in the franchise-sale process.

How Does a Lawyer Help with Drafting a Franchise Disclosure Document?

Franchise lawyers are vital to ensuring compliance with two main principles that apply in the drafting of a FDD. The first principle is that the FDD must be drafted in plain English. While this does not prohibit the use of artful language in making the necessary disclosures, there is a fine line between artfully drafted and overly descriptive FDDs. Our team is well informed of where certain language should and should not be used, and could save a franchisor the time, expense, and headaches associated with an improperly drafted disclosure document.

The second principle is that an FDD should disclose only the information required under each of the twenty-three items—nothing more. Innocent candor resulting in over-disclosure of information can sometimes hinder the FDD registration process and ultimately hurt the franchisor.

A franchise lawyer well-versed in the Amended Rule’s requirements knows which information is necessary and which is merely surplus. By working with our team to draft a FDD, a franchisor can be assured that the process will go as smoothly as possible, and that when the document is filed for registration, it will be done artfully, efficiently, and most of all, correctly. Contact us today to get started.