When a person decides to invest in a franchise business, it is important to review the Franchise Disclosure Document (FDD). Also known as a Uniform Franchise Offering Circular (UFOC), this document discloses critical information about the franchise program and company to the potential franchisee, allowing them to make an educated decision on their investment. Here is a look at the anatomy of a Franchise Disclosure Document and what franchisees need to be aware of when reviewing it.

I. Introduction
II. Table Of Contents
III. Items Included in the FDD
a. Name and Address of the Franchisor
b. Business Experience
c. Litigation History
d. Bankruptcies
e. Initial Fees
f. Financial Performance Representations
g. Earnings Claims
h. Franchisee’s Obligations
i. Restrictions on Sources of Products or Services
j. Franchisee’s Right to Renew, Transfer, or Terminate
IV. The Cover Sheet of the FDD
V. The Franchise Agreement
VI. State Registration Requirements
VII. How to Request Copies of the FDD
VIII. Conclusion

Items Included in the FDD

The FDD includes 23 different items that provide franchisees with important information about the franchise opportunity. Below is a look at the 23 items.

  1. Name and Address of the Franchisor – This is typically the first item in the FDD and provides the name and address of the franchisor. It also provides the name and addresses of the company’s current officers and directors.

  2. Business Experience – The franchisor’s business history is provide, including the length of time the business has been in existence, it’s previous experience in the industry, and the number of franchises currently in existence in the United States.

  3. Litigation History – The franchisor must disclose any lawsuits or other legal proceedings they are currently involved in, as well as any that have been initiated against them in the past. This includes any claims or disputes they have had with their current or former franchisees.

  4. Bankruptcies – In the event that the franchisor or its officers or directors have declared bankruptcy in the past, it must be disclosed in the FDD.

  5. Initial Fees – The franchisor must provide detailed information regarding any upfront fees or costs the new franchisee will be responsible for when entering into the franchise agreement.

  6. Financial Performance Representations – This item provides potential franchisees with estimated financial projections based on the performance of existing franchises. While franchisors are not allowed to make specific earnings claims, this item provides an estimated range of possible income that a franchisee can expect to generate.

  7. Earnings Claims – This item states that the franchisor does not provide any specific earnings claims, and that any estimates provided in the financial performance representations are not guaranteed.

  8. Franchisee’s Obligations – This item outlines the obligations that the franchisee is responsible for, including the payment of required fees, maintaining adequate insurance, and participating in any required training programs.

  9. Restrictions on Sources of Products or Services – The franchisor must provide information on any restrictions placed on the franchisee with regard to the approved source of products and/or services.

  10. Franchisee’s Right to Renew, Transfer, or Terminate – This item outlines the franchisee’s rights if they wish to transfer ownership of the franchise, or the franchisor’s terms for renewing or terminating the agreement.

The Cover Sheet of the FDD

The cover sheet of the FDD is designed to provide potential franchisees with a summary of the most important points from the FDD. This includes contact information for the franchisor, a summary of the fees, and a summary of any litigation or legal proceedings.

The Franchise Agreement

The franchise agreement is included in the FDD and should be reviewed carefully. It is a legally binding agreement between the franchisor and the franchisee and outlines all of the rights and obligations of both parties, including fees, franchisee responsibilities, and restrictions on the franchisee’s activities.

State Registration Requirements

The franchisor must abide by all franchise disclosure laws specific to the state in which it is operating. This includes any state-specific requirements that the franchisor must follow when offering franchise opportunities.

How to Request Copies of the FDD

Potential franchisees can request a copy of the FDD from the franchisor. The franchisor must provide a copy of the FDD to anyone considering investing in their franchise before they can be asked to sign the franchise agreement.

The FDD provides critical information to potential franchisees about the franchise opportunity. It gives franchisees the information they need to make an informed decision about the investment and allows them to understand their rights and obligations before entering into a franchise agreement. A thorough review of the FDD is essential for anyone considering investing in a franchise business.