By Georgio Salas.
Updated Nov 26, 2020
The Franchise Disclosure Document
What can you learn from the Franchisor’s FDD?
History of the FDD
Prior to the 60s, there was little franchising momentum in the US. However after the success of McDonald’s, many other companies began to franchise their concepts and the franchise industry expanded rapidly. In 1979 the Federal Trade Commission’s FTC Rule became effective. This rule required all franchisors submit to all potential franchisees a document called the Franchise Disclosure Document (FDD), formerly called the UFOC. The purpose of the FTC Rule (manifested in the FDD) was to provide enough information so the prospective franchisee could make an informed decision about purchasing the franchise.
The FDD serves as a protection for the individual against making a decision based on information not supported by fact. The FTC Rule requires franchisors provide the FDD to the prospective franchisee at the earlier of the first personal meeting or 10 business days before the franchisee signs an agreement or pays any money. It also provides that the franchise agreement must be given to the prospective franchisee at least five business days before the franchisee signs any agreement or pays any money. A franchisor’s FDD must be updated on an annual basis, or sooner if certain conditions are met.
Here are some of the items a FDD must contain:
Individual State Requirements
In addition to the laws that mandate disclosure, there are also some states that have passed specific laws to further protect franchisees in that state. These laws may add additional disclosures or rules about franchise agreement terms. As an example of this, there are a number of states that require that the legal venue for any dispute must be in their state rather than in the state where the franchise company is located. These types of additional requirements vary from state to state but any that are appropriate to your situation in your state should be disclosed in the FDD you receive.
The most important point to remember regarding the FDD is that you need to read and understand the material that the franchisor is disclosing to you. The FTC has a requirement that these documents must be presented in understandable English so that the material should be clear. It won’t make any difference, however, if you don’t carefully review the material.
Make sure you take the time to study the information supplied to you and you’ll have a much better chance of making sure that these legal requirements actually serve their purpose of protecting or safeguarding your interests.
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