7 Things Not to Miss in the FDD
Pay close attention to these sections to protect yourself.
Aside from the operations manual itself, no other document in the franchise investigative process is as important as the franchise disclosure document (FDD). Much like the franchise industry itself, the FDD is bound by the regulations of the Federal Trade Commission (FTC), which states that ownership candidates must receive it no less than 14 days before signing any official paperwork regarding a purchase. The FDD is comprised of 23 different sections, and it's highly advisable you seek professional legal and accounting assistance when reviewing the document.
To keep you as informed as possible, here are seven sections not to miss in the FDD.
Item 1: All about the franchisor
Item 1 in the FDD contains information related to the true owner of the brand. This section should contain information on who they are, if they're owned by another entity and any other affiliated companies. How long have they been in business? When did the brand begin franchising its product or service? Expect to get the full history of the brand in this section.
Items 5-6: Just the fees, please
Item 5 of the FDD contains all the information related to the initial fees charged by the franchisor. This includes the official franchise fee and any other initial fees associated therein. Item 6, which is also fee-related, contains any disclosures on other fees, including but not limited to recurring fees, occasional fees, royalties and even advertising fees. Break out a calculator and make sure you have a thorough understanding of the total fees you'll be responsible for as a franchisee.
Item 9: What's my obligation?
Item 9 of the Franchise Disclosure Document details the franchisee's legal obligations and should include a list describing each instance. If you want to know what you're responsible for from the franchisor's perspective, Item 9 discloses it. With thousands of franchise concepts on the market, this section's information can vary quite a bit. When you're reviewing the FDD, always ask questions for anything you're unsure of or don't understand.
Item 12: Setting some boundaries
Item 12 deals with a franchisee's specific territory of operations and gives you an understanding of your business's boundaries. What's at stake is the actual radius of your operation. Item 12 should also disclose if your territory is exclusive or protected from the competition in any way. This is one section where mutual understanding is a must.
Item 14: Tale of the trademarks
The FDD's Item 14 is an important section, as this portion details the legal usages of the franchisor's patents, copyrights, trademarks and other proprietary information. How exactly are you allowed to use the brand's trademarks and likeness? Item 14 spells it out for you. Again, if you sense there's a gray area, make sure to ask about it.
Item 16: Offer up!
Item 16 discloses what franchisees are allowed to offer and sell, according to the franchisor. This section should include a strict description of the products and services you can present to your customers. For example, restaurants will typically have a detailed list of menu items. If it's not on the list, you can't offer it for sale — no matter how well you think that special dish you invented will sell.
Item 19: Sales and financial performance
Of all the sections in the FDD, perhaps none gets as much attention as Item 19, which deals with the brand's financial performance representations. This section includes and discloses any statements or claims from the franchisor as to the financial performance of existing units, and the benchmarks for how they may perform for prospective franchisees. Item 19 falls under specific FTC guidelines. To put it bluntly: If it's not included in Item 19, the brand's representatives are prohibited from making any claim related to their financial performance.
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