It is recommended that whenever you are interested in a franchise, you call as many franchisees as possible to fully review the offer. An FDD contains 23 specific pieces of information (called articles), the franchisor`s franchise agreement, and various documents (such as a list of current and past franchisees and verified financial data from the franchisor). All franchise buyers must use the information contained in the FDD in their franchise search. Point 8 depends heavily on the type of franchise you are developing. This section covers the franchisor`s relationship with suppliers as well as authorized suppliers and any restrictions or mandatory purchases. According to the Federal Trade Commission[3], there are 15 states where franchisors are required to provide an FDD to franchisees before signing a franchise agreement. Thirteen of these states require them to be submitted by a public state document body. Franchise buyers who plan to finance their business should pay particular attention to FDD points 2, 7, 15 and 20. Lenders participating in the provision of state-guaranteed loans (SBA loans) to borrowers take into account the FDD (paragraphs 2, 7, 15, 19 and 20) [4] when considering a loan application. The FDD must also be approved by the SBA to be eligible for SBA funding. A list is provided by lenders/CDCs to assess the eligibility of a small business operating under an agreement. [5] Be sure to read each fee, when the fee is due, the amount, and any comments/notes associated with it. It is strongly recommended that anyone dealing with a franchised lawyer speak to a franchised lawyer to better understand the remarks and notes associated with each fee.
There are also other states that do not require FDD registration, but require the franchisor to file its FDD with the state to sell franchises. Below, we discuss FDD in more detail, including what should be included in an FDD, when an FDD should be disclosed to potential franchisees, and when an FDD should be updated and registered. A franchise is a license that a party (the franchisee) acquires to give them access to the proprietary knowledge, processes and brands of a company (the franchisor). This gives the franchisee the opportunity to sell a product or provide a service under the company name. In exchange for acquiring the franchise, the franchisee typically pays the franchisor an annual initial start-up and licensing fee. The Federal Trade Commission Rule of 1979, which governs the disclosure of material information when selling franchises to the public, underpins state FDDs and prohibits any private right of action for violation of the disclosure provisions prescribed by FDDs. Therefore, the FDD implies that only the federal or state governments have the right to sue and negotiate consent orders and withdrawals with franchisors that violate the provisions of the FTC`s franchise rule. Various state franchise laws that provide for the use of an FDD instead of their own disclosure requirements can create private rights of action if a franchisor has violated its disclosure obligations in its FDD. This section provides a summary of the upfront costs associated with purchasing and operating a franchise. Typical fees may include: franchise/development fees (and related deposits), initial equipment/accessory purchases, technical/software fees, delayed opening fees, training/certification fees, and opening support fees. The FDD contains essential information for potential franchisees who wish to make a significant investment.
Each document should include the following sections in the order shown below: Buying a franchise offers the right to use a business brand for a certain period of time (this is an interesting feature of the franchise). Item 13 of the FDD contains a summary of the company`s trademarks and how they may be used by the franchisee. Under the Franchise Rule applied by the Federal Trade Commission (FTC), a potential franchisee must receive the franchisor`s FDD franchise disclosure document for at least 14 days before being asked to sign a contract or pay money to the franchisor or an affiliate of the franchisor. The prospective franchisee has the right to request (and receive) a copy of the sample franchise disclosure document once the franchisor has received the potential franchisee`s application and has agreed to review it. The franchisor may provide a copy of its franchise information materials on paper, by email, through a website or on a disk. Requirements for franchise information documents. [2] • Point 11: Support for franchisors, advertising. Computer systems and training. This section describes the services that the franchisor provides to the franchisee.
The FTC`s franchise rule allows a franchisor to provide information about the actual or potential financial performance of its franchise and/or franchisor-owned outlets if there is a reasonable basis for the information and the information is included in the disclosure document. Point 1 provides an overview of the context and history of the franchisor. Some important things to watch out for are how long the franchisor has been in business and whether they started another business or had a predecessor. The history of a franchise can provide a more complete understanding of the company`s future growth and success. Item 6 contains a summary of the additional non-reimbursable costs associated with the operation of the franchise business. As a general rule, an item 6 of a franchisor includes its royalties as well as the rates of advertising funds (which, depending on the deductible, may represent a percentage of revenues or fixed values), other costs that may be listed may include transfer fees, additional training costs, insurance premiums and costs of attending conferences, as well as potential penalties (default interest, insufficient funds fees, audit costs, etc.). In addition, this section should also indicate whether the franchisor has sued any of its franchisees in the past year. .