What is a Franchise Disclosure Document (FDD)?

Any franchise agreement will include lengthy amounts of paperwork. One of the types of documents that is the most important is the franchise disclosure document or FDD. Understanding the importance of this document is an essential part of starting a franchise.

An FDD is a document that lays out what the business relationship will be. It explains the roles, duties, and responsibilities of both the franchisee and the franchisor. Due to the Federal Trade Commission’s rules, this document is legally required in any franchise sale. Though the FDD was only made a legal requirement in 2007, prior existing franchisors are still required to comply with all the newer rules. A franchisor is obligated to provide the disclosure document at least 14 days before money is exchanged, and it must be signed. The franchisee is then given time to review it before they sign each portion. Following the franchising application, the franchisee has the right to get a copy of their signed document.

The FDD helps protect both involved parties. It clearly describes all the financial matters, so the franchisee is not surprised by any unexpected fees later on. Franchises vary a lot in their approach, so it helps franchisees to know precisely what to expect before they finalize the deal. On the franchisor’s side, the document can help protect them from risks and liability if the investment goes wrong, and it ensures they can collect on any money they are owed.

An FDD has to be divided into 23 sections that intensively discuss all relevant business matters. It must cover the franchise’s initial fees, future fees, and potential performance. If any public figures, trademarks, patents, copyrights, or proprietary information are involved, they must be included in the document. The document must discuss how the franchise is run and what obligations both parties have to operate the franchise. Rules about what types of products the franchisee can sell or which territories they can operate in must be disclosed. Finally, the document must discuss how renewal, termination, litigation, bankruptcy, sale, and dispute resolution is handled.

Originally published at https://tutoringcenter.com on December 15, 2020.