Rick Mayo, Alloy Founder and CEO, explains what the Franchise Disclosure Document (FDD) is and why it is important. The FDD is a critical document that will help you excel in your new venture and avoid common missteps along the way. In this blog, we’ll discuss the importance of the FDD, what this essential document contains, and how it will help guide your new business venture.
When you buy a franchise, the FDD is one of the first documents that will come across your desk. The FDD disclosures what a franchise must provide to any person buying a franchise in the US. The FDD was previously called a Uniform Franchise Offering Circular (UFOC). However, the Federal Trade Commission (FTC) revised it back in July of 2007. The FDD is issued as part of the pre-sale due diligence process, and contains information including the following:
- Information about the roles, obligations, and duties of both the franchisor and the franchisee.
- Detailed information about how the franchisee’s investment will be distributed, what the initial start-up costs cover, and what expenses will be required in the future.
- Legal information meant to protect both the franchisor and the franchisee from liability during the process of opening, doing business, and serving customers.
- Information regarding required marketing, advertising, hiring, and staffing procedures.
- And more.
While FDDs tend to contain a certain type of information, each varies depending on the franchise that issues it.
The Importance of Franchise Disclosure Documents (FDDs) for Franchisees
The franchisee will receive a FDD before they choose to formally invest in the franchise. This allows the franchisee to get the information they need to make a well-informed decision about whether to invest in the franchise, and to assess how their initial investment will be used.
The document will also provide key information about how the business relationship between the new business owner and the parent company, the franchisor, will operate. While the details may differ from company to company, the FDD will always provide critical details about what is expected of the franchisor, including hiring details, advertising requirements, fee schedules, and any other important legal considerations.
Put simply, the FDD helps the franchisee understand what to expect and to find out whether the franchise opportunity is truly a good fit.
Why FDDs Matter for Franchisors
As a franchisor, the FDD provides several layers of business and legal protection. By spelling out what the franchise company expects from each franchise, the FDD creates a level of cohesion, predictability, and recognizability for each franchise location. Additionally, the FDD spells out the responsibilities of both the franchisor and franchisee, protecting each from liability and defining the standards of the business relationship.
Required Components Of The FDD
Regardless of how the FDD differs from franchise to franchise, each will contain the following sections:
1. Information About Involved Parties
The FDD will include a section that provides details about the franchisor and any affiliates, predecessors, or parents that are also involved. This section will underline the franchise’s business ties and how long the company has been in business.
2. Business Experience
Next, the FDD will outline the company history and background experience of any leadership team responsible for running the system.
This section of the FDD will provide important details about litigation, including what happens in the case of pending or material actions, and in any prior actions directed at the franchise.
One of the most critical segments of the FDD document outlines what happens in the event of bankruptcies that involve the franchise, its affiliates, and its predecessors. This is an especially important segment for franchisees to take note.
This section of the FDD will disclose fees charged to the franchisee, how those fees will be used, and what the continuing fee schedule will be. This section of the document may also provide stipulations regarding the conditions of possible financing arrangements if the franchise offers them.
6. Ongoing Fees
In addition to discussing the initial fees involved in the franchise startup, the FDD will also disclose other fees that the franchisee will be required to pay later.
7. Initial Investment
Next, the FDD will cover the projected initial investment for franchise ownership. The document will lay out the possible range of the initial investment, as well as an estimate of working capital.
In addition to providing financial information, the FDD will also detail restrictions on the sources of services, products, goods, and more. The document will also disclose financial relationships and ownership between the franchise and any suppliers it uses.
9. Stipulations For Assistance
The FDD will outline the help and support the franchisor will offer, including help with advertising, training, payroll and computer software, and more.
The FDD is one of the primary documents that outlines the franchise’s trademark information, as well as any other trademarks that are also registered with the franchise. This same section may also outline patents, protected information, and copyrights that are not covered under the umbrella of a trademark.
The FDD will outline any relevant limitations on the materials or services the franchisee is permitted to sell or offer under the umbrella of the franchise disclosure document.
12. Termination And Renewal Information
The FDD will outline transfer, dispute resolution, termination, and renewal proceedings.
13. Financial Statements
The FDD also includes financial statements. In fact, the FTC requires franchisors to provide financial statements from the last three years to any potential franchisee as a part of the franchise disclosure document. This may also include balance sheets, cash flow statements, and more.
Finally, the FDD will include contracts that outline the franchise agreement. This critical section may cover the details of financing agreements, personal guarantees, licensing agreements, product supply stipulations, and more.
Take The Next Step Toward The Franchise Of Your Dream
The franchise disclosure document is an essential piece of paperwork for both franchisors and franchisees. If you’re considering investing in a franchise, it’s essential to read this document carefully, and to understand how it impacts important considerations like finances and obligations.
Here at Alloy Personal Training Franchise, we provide a comprehensive FDD that outlines every detail of our franchise agreement and helps our would-be-franchisees understand exactly how we’ll support them in their journey.
To learn more about our franchise opportunity, contact us today to request your free information packet.
Learn more with these articles:
- 5 Reasons to Invest in a Fitness Franchise Now
- Franchise Questions Prospects Should Ask Before Buying
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