What Is a Franchise Disclosure Document? A Quick Guide

Michael Nicholas / Franchising / November 15, 2022

Deciding to purchase a franchise is a huge investment, but perhaps the most challenging decision you’ll make isn’t whether to buy into a franchise or not, but instead, which one is the right opportunity for you.

In 2022, it is estimated that the US will have 792,000 different franchise establishments. That’s a whole lot of choices! Luckily, the standardization of the franchise disclosure document helps potential investors weigh the pros and cons of various opportunities before making such a momentous financial decision.

Still, franchise disclosure documents may be extremely long and potentially confusing if you don’t understand them. So keep reading for a quick guide on what is a franchise disclosure document, what elements are included, and why they’re essential.

What Is a Franchise Disclosure Document?

A Franchise Disclosure Document, or FDD, is a legal disclosure document that all potential franchisees must receive from the franchisor before they purchase a franchise. The franchise disclosure document is required by the Federal Trade Committee (FTC) and contains detailed information about the franchise, including its history, financial performance, terms and conditions of the agreement, and more.

Preparing or understanding an FDD can be difficult for even the most experienced business owners. There are twenty-three items or sections that make up the franchise disclosure document, with each section requiring specific legal information.

However, the FTC’s Amended Franchise Rule puts specific rules and guidelines on what must be included in the document and the order in which the information is listed. This helps potential franchise buyers compare the specifics of one opportunity to others and understand what will be included in the franchise agreement.

Why Is a Franchise Disclosure Document Important?

The FTC initially standardized the requirements of FDDs to help end questionable business practices by franchisors. These regulations on what the FDD must encompass have had many positive benefits for potential franchisees.

Some significant reasons that the FDD is essential are:

Makes It Easier to Compare Multiple Franchise Opportunities

Each potential franchise agreement comes with different fees, training opportunities, proprietary knowledge, trademark agreements, franchisee-franchisor relationships, and requirements. Therefore, studying franchise disclosure documents is essential to the due diligence process when considering franchise opportunities.

While each franchise relationship is set up in its own way, having the details laid out in a similar document with the same items and order can make comparing options much easier for investors.

Provides a Clear Understanding of Business Relationships

No two business relationships are exactly the same. Potential franchisees need to understand exactly what is expected or required on their part. This may include restrictions on what franchisees can sell, termination clauses, participation obligations, and more. It’s equally essential for them to comprehend what kind of support and training they will or will not receive in a franchise business relationship.

First-time franchisees or inexperienced entrepreneurs may not even know what questions to ask during the discovery process. Therefore, the FDD requires that franchisors clearly explain pertinent information to all potential investors before the signing of any contracts or payment of any fees.

Shows a Financial History of the Franchise

Franchisors may make all sorts of claims regarding potential income opportunities for franchisees, but on the FDD, they are required to include specific financial statements that show the actual financial situation of that franchise.

The franchise disclosure document requires that any previous bankruptcy is disclosed as well as audited financial statements for the last three years. These records include income statements, cash flow statements, and balance sheets. This information gives entrepreneurs a chance to truly understand the financial history of potential franchises and make a more informed decision.

Prevents Shady Franchise Tactics

Before the FTC codified requirements for franchise disclosure documents, some franchisors conducted shady business practices. The FDD is intended to provide accurate factual information to potential investors versus vague promises.

The FDD requires that franchisors provide full transparency before franchisees make any legally binding decisions. This has helped minimize scams in the franchising industry and helped prevent entrepreneurs from making poor business decisions due to a lack of information or understanding.

What Are the Key Items in a Franchise Disclosure Document?

The FTC has set particular requirements for what is to be included in a franchise disclosure document. In fact, it’s mandatory to list each of the twenty-three sections in the exact order listed below. The sections must also be written in plain English.

Keep in mind that these are short overviews of what should be included in each section. However, each item has multiple more detailed requirements that may not be listed.

  1. The franchisor, and any parents, predecessors, and affiliates: The first section is meant to lay out the corporate structure of the franchisor. This item should establish how long the franchisor has been operating, information about parent companies or former owners, and the franchisor’s other business activities.
  2. Business experience: Requirements for this section include a disclosure of the names and positions of the executive management team responsible for the daily operations of the franchise system.
  3. Litigation: This item is meant for the disclosure of past and pending lawsuits and material actions that the franchisor has been involved in, including those of its predecessors, affiliates, or individuals included in section two.
  4. Bankruptcy: Here, a franchisor must disclose if the franchise, any affiliates, predecessors, or individuals of the management team have filed for bankruptcy within the past ten years.
  5. Initial fees: Franchisors must disclose any and all upfront fees required by the franchisee in order to open and operate the franchise. Typically, this includes the franchise fee, costs for opening inventory and equipment, and any other pre-opening fees.
  6. Other fees: This section includes recurring fees that a franchisee will be required to pay throughout the rest of the agreement. These include costs such as ongoing royalties, as well as fees for marketing, training, brand development, technology, software, and more. Any payments that aren’t clearly disclosed in the FDD could be disputed down the line.
  7. Estimated initial investment: The estimated initial investment should include a low and high range of potential total investment for the franchisee to establish the business. It’s shown in table format and should have estimates for every possible cost to get the franchise up and running.
  8. Restrictions on sources of products and services: This section will designate requirements for sourcing specific goods and services from the franchisor or selected suppliers and if those businesses have relationships with the franchisor.
  9. Franchisee’s obligations: The franchisee’s obligations must be listed in table format and include all specific legal obligations ranging from site selection to compliance with standards, restrictions on what’s offered, remodeling requirements, and more.
  10. Financing. The financing section should cover whether the franchisor offers any financing of initial fees as well as the terms and conditions of any arrangements offered.
  11. Franchisor’s assistance, advertising, computer systems, and training: If a franchisor offers assistance or training for their franchisees, it should be disclosed in this section. This item will also contain any specific requirements imposed on advertising and computer and software systems.
  12. Territory: Some franchisors impose geographical restrictions for franchisees to do business within a certain territory. That information must be disclosed in section twelve. However, not all businesses are obligated to limit territory.
  13. Trademarks: This section should include any trademarks of the franchise system, their registration status, and any potential or current disputes or conflicts relating to franchise trademarks.
  14. Patents, copyrights, and proprietary information: Section fourteen should clearly outline the ways in which franchisees may use patents, copyrights, and proprietary information.
  15. Obligation to participate in the actual operation of the franchise business: Here, franchisors must include specific obligations they impose on franchise owners for the day-to-day business operations. For example, some franchisors may allow a hands-off owner, while others expect direct participation.
  16. Restrictions on what the franchisee may sell: This section covers restrictions on what goods and services may be offered to customers.
  17. Renewal, termination, transfer, and dispute resolution: Franchisors must disclose how any potential legal disputes between a franchisor and a franchisee will be resolved. This section should also cover legal rights and obligations surrounding the renewal, termination, or possible transfer of ownership of a franchised business.
  18. Public figures: This item is an outline of any public figures or celebrities that are associated with the franchise business for advertising or promotional purposes.
  19. Financial performance representations: Franchisors may decide if they plan to make a financial performance representation (FPR) to potential franchisees. However, if they do, in this section, they must disclose these FPRs. In addition, they must demonstrate a reasonable basis with specific detail for any claims made.
  20. Outlets and franchisee information: This section includes statistical information on the current and former franchisees across the past three years, such as non-renewed, canceled, or terminated franchises.
  21. Financial statements: Depending on how long the franchise has been operating, the franchisor must disclose certain financial statements. In the first two fiscal years, requirements are less stringent. However, in the third fiscal year and later, there is a large number of financial statements that must be disclosed. These can include balance sheets, statements of operations, cash flows, and more.
  22. Contracts: The franchisor must list and attach all related contracts that would be potentially signed between the franchisee and the franchisor. The most obvious example is the franchise agreement, but it should also include any other contracts the franchisee must sign.
  23. Receipts: This page is where the franchisee can sign to confirm that the franchise disclosure document was received.

Franchise Disclosure Document FAQ

Do you still have a few questions regarding franchise disclosure documents? Check our FAQ below!

When should a potential franchisee receive the FDD?

An FDD must be delivered to a potential franchisee not less than fourteen days before paying any fees or signing any legally binding contracts. This time period commences when the potential franchisee signs the receipt page.

What is the difference between a disclosure document and a franchise agreement?

A franchise disclosure document is not a legally binding contract like the franchise agreement is. The FDD is a document intended to disclose all pertinent information needed to make a large investment decision. In contrast, the franchise agreement is the legal agreement that officially starts the franchise business relationship between two parties.

Are there state requirements for franchise documents?

There are states that have additional laws or registration requirements for FDDs. Franchise registration states require one-time or annual franchise filings. Be sure to check for specific franchise disclosure requirements for the state or states you’re operating in.

Are franchise disclosure documents public record?

Not all FDDs are public record because many franchise companies are privately owned. There is no requirement by the FTC that FDDs are public record. However, some state laws may require that an FDD is filed and registered with the state. These states are called franchise registration states, and thirteen of them require that FDDs are filed by a state agency for public record.

How do I get a franchise disclosure document?

You can search for publicly available franchise disclosure documents. However, the best place to receive the most up-to-date FDD is directly from the franchisor. They are required to give potential investors a copy of the FDD at least fourteen days before signing any contracts.

Is a franchise disclosure document binding?

An FDD is meant only as a disclosure document and therefore is not binding. If you sign the receipt page of a franchise disclosure document, you are only acknowledging that you received the document.

Request a FDD from P3 Cost Analysts Today

If you’re looking for a reputable franchise opportunity that offers a transparent franchise disclosure document, consider a franchise with P3 Cost Analysts. By working with P3, you have the opportunity to earn a living by helping other business owners save money.

In our FDD, you’ll get detailed information about all upfront costs, plus clear details on our hands-on start-up training, follow-up correspondence training, marketing assistance, and more. We pride ourselves on full transparency with potential franchisees, so we’re happy to sit down and speak with you in more detail about any questions you may have.

If you’re interested in starting a P3 Cost Analysts franchise, contact us today at 1-877-843-7579 or fill out the form on our franchising page, and we will answer any questions you have about the process and opportunity.

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