An Overview of the Franchise Disclosure Document
The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information on the franchisor, the franchise system, and the agreements they will be required to sign before they are allowed to become a franchisee. The purpose of the FDD is to enable a prospective franchisee to make an informed investment decision.
The FDD is only part of the information a prospective franchisee needs, and that’s why it is important for prospective franchisees to work with qualified franchise lawyers and consultants in evaluating any franchisor’s FDD and every franchise opportunity.
Franchisors are required to update their FDDs within 120 days after the end of their fiscal year, and may be required to update the FDD on a quarterly basis or sooner if there have been any material changes to the franchise system or the information in the franchisor’s disclosures.
What you will find in the FDD
The FDD is long, and new franchisees will find terms that sound familiar but might not mean what you think they do — and that after the FTC required it be prepared in “plain English.” Not counting the cover page, the FDD contains 22 areas of disclosure—referred to as Items—and a receipt. The receipt page is important because it details the date the disclosure document was provided to the prospective franchisee so that both the franchisor and franchisee know when the mandated waiting period before a franchise agreement can be signed has ended.
According to the FTC, franchisors are required to make material disclosures in five categories:
- The nature of the franchisor and the franchise system
- The franchisor’s financial viability
- The costs involved in purchasing and operating a franchised outlet
- The terms and conditions that govern the franchise relationship
- The names and addresses of current franchisees who can share their experiences
In addition, if a franchisor elects to provide prospective franchisees with a financial performance representation, the franchisors must have a reasonable basis and substantiation for any of the information provided and allow the franchisee to review the franchisor’s substantiation.
The FDD waiting period
“I’ve completed my research, visited the franchisor, received a copy of the FDD, read and understood the agreement, and made my decision. I want the franchise now. Why can’t I sign the franchise agreement today?” The answer: The law requires a waiting period referred to as the 14-day rule.
A franchisor is required to wait a minimum of 14 calendar days after delivering to a prospective franchisee its FDD before allowing a prospective franchisee to sign the franchise agreement or pay the franchisor any money. The clock starts ticking once you have received the disclosure document and have signed the receipt. If you would like to receive a copy of the FDD earlier than 14 days before signing the franchise agreement, just ask for it.
You may receive a copy of the FDD by memory stick, CD-ROM, e-mail, or Internet download. It’s going to be long, perhaps more than 200 pages, and may be 6 MB in size. If your computer or network system can’t efficiently download a document of that size, or if you just can’t bear to read the document on a screen, you have the right to request a paper copy from the franchisor.
Once you and the franchisor have begun to discuss you becoming a franchisee, upon reasonable request you are entitled to receive the FDD either in printed or electronic format. The purpose of the 14-day rule is to give you time to think about your decision to become a franchisee, and you should take your time reviewing and understanding what is included.
The FTC Rule also requires a seven-day waiting period for the franchise agreement under some circumstances. If the franchisor makes unilateral changes to the form of the franchise agreement provided in the FDD or includes information in the final agreement that you have not had a chance to review, then the franchisor must provide you with the completed franchise agreement at least seven calendar days before signing. This gives you time to review and consider the revised terms of the agreement. Not to get too technical, if the changes to the agreement benefit you, then you may not need to wait another seven days.
These rules serve an important purpose. When you initially make the decision to invest in a franchise opportunity, your enthusiasm for the deal generally runs high. Becoming a franchisee can often be a very emotional decision and a talented franchise salesperson can make it almost feel like investing in the franchise is the most important thing you can do.
The 14-day and 7-day delays allow you time to reflect on your decision and give you and your advisors time to conduct a proper due diligence. Once you sign the agreement, even if you haven’t consulted with a lawyer, you’re going to be obligated by the contract you sign. With an investment as important and sometimes as complicated as a franchise, spending the money on a qualified franchise lawyer to help you make your decision is essential.