8 Items You Should Expect to Find in the Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is a document drafted for the purpose of providing a prospective franchisee with the information they need to make an informed decision about franchise ownership. While the contents of each document may vary, each FDD is required to contain the certain key sections, which are considered standard to the franchise ownership process.
Initial Fees and Other Fees
Franchisors must disclose in these sections any fees they will be charging their franchisees, including royalties and initial startup fees.
Estimated Initial Investment
Franchisors are required to provide prospective franchisees with an estimate of their initial investment, so they have the information they need to make a fully educated decision.
Supporting Strategies offers defined marketing/business development territories. While franchisors are not obligated to provide franchisees with an exclusive or protected territory, they must disclose it here if they do.
Financial Performance Representations
Franchisors are not obligated to provide franchisees with any information on sales, earnings, or expenses, but if they do, they will provide it in this section of the FDD. The financial performance representation does not have to be in the form of income statements or prepared in accordance with GAAP, so there’s a good deal of flexibility as to what franchisors may choose to disclose.
Outlets and Franchisee Information
In this section, franchisors will provide a table that summarizes, among other things, the number of franchises that were opened, the number of terminations, the number of franchises that were closed, and the number that changed hands in the past three years. They will also provide contact information for all franchisees in their system, along with the contact information of franchisees that left the system in the past fiscal year.
Here, you’ll find three years of audited financial statements, including balance sheets, statements of operations, owner’s equity, and cash flows. Since most franchisors create a new business entity when they begin franchising, the FTC has developed a “phase-in” rule that allows a startup franchisor to provide an unaudited balance sheet in the first year of franchising and an audited one in the second year. This can be useful for really getting an idea of the franchisor’s financial status, and help you make an educated decision about your investment.
This is where the franchisor provides you with any contracts you will need to sign as part of the startup process. These will include the franchise agreement, as well as financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other appropriate contracts.
If you have any questions relating to Supporting Strategies’ Franchise Disclosure Document, don’t hesitate to contact us today. We’re happy to clarify our process, and address any concerns you may have.
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