The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision.
Item 1. The Franchisor, and any Parents, Predecessors and Affiliates
The first point gives you the background of the franchisor or any parent company, predecessor or affiliate. A forerunner or say predecessor is characterized as “a man from whom the franchisor gained specifically or by implication the significant part of its advantages.” A member or affiliate is characterized as “a man controlled by, controlling, or under regular control with the franchisor.”
Item 2. Business Experience
This point gives you all the information about past five years of business experience of the franchisor’s executives, trustees, partners, officers and some other people who’ll have administration obligations related with the offered franchises.
Item 3. Litigation
In this section, the franchisor must reveal any material prosecution including the franchisor and predecessor, parent and affiliate, if the case includes claims about the franchisor’s business procedure, their execution under the franchise documents and claims of antitrust, extortion, unjustifiable or unfair trade practices, or comparable allegations. The franchisor should also uncover any franchisor-started prosecution against its franchisees and any other business cases (regardless of the possibility that it’s not franchise related) if, toward the day’s end, the case adversely impacts the franchisor’s budgetary condition or their capacity to work a franchise.
Item 4. Bankruptcy
This section should reveal any bankruptcy in the previous ten years that included the franchisor and any parent, predecessor, associate, officer or general partner of the franchisor, or some other person who will have administration duty relating to the deal or operation of the franchise.
Item 5. Initial Fees
Here, the franchisor must unveil the greater part of the underlying expenses they charge to the franchisee before opening. Such expenses incorporate the underlying charge paid to buy the franchise rights (frequently called the “initial franchise fee”), PC or POS gear that must be obtained just from franchisor or their subsidiaries, and comparative charges.
Item 6. Other Fees
This area of the FDD educates you with respect to some other expenses you’ll need to pay to the franchisor or a partner and in addition costs that are gathered by the franchisor for outsiders or third party, or that are generally imposed. Line things incorporate a statement of the royalties, promoting expenses, service expenses, training expenses, restoration charges and other similar one-time or ongoing charges.
Item 7. Estimated Initial Investment
In this section, the franchisor must unveil a scope of the base and maximum of all charges, expenses and costs that the franchisee will bring about before opening the business, including the underlying franchise fee, genuine property costs, for example, lease and construction costs, the cost for PC gear and comparative details. The costs must incorporate both pre-opening costs and those brought about amid the “initial stage,” which is no less than three months or a sensible period for the business.
Item 8. Restrictions on Sources of Products and Services
Franchisors require franchisees to purchase the goods and services required just from approved merchants. This segment records the approved sellers and furthermore gets out the franchisor’s specification for allowing another merchant into the framework. It will distinguish any income the franchisor gets from the required purchases, including discounts received by the franchisor from any supplier.
Item 9. Franchisee’s Obligations
This section records your commitments as a franchisee, with references to the segments of your franchise agreement that contain the commitments. The motivation behind this is to distinguish your foremost commitments under the franchise agreement and other agreements.
Item 10. Financing
On the off chance that the franchisor supports financing for new franchisees, it will be spelled out in this area.
Item 11. Franchisor’s Assistance, Advertising, Computer Systems and Training
This is one of the longest and vital revelation items. In this Item, the franchisor must disclose:
- The services and support they’ll give to the franchisee before and after opening.
- All promotion expenditure you’re expected to assume.
- The normal time it takes a franchisee to open.
- The kind of computer and similar hardware important to work the business.
- A detailed description of the training you can hope to get.
- The chapter by chapter list of the operations manuals.
Item 12. Territory
The franchisor must reveal whether it offers franchisees an “exclusive territory” inside which to operate the business. With a selective region, the franchisor guarantees that it won’t allow another franchisee to locate within the region and that it will likewise abstain from putting an organization-owned or subsidiary business there. This Item should likewise reveal whether you can relocate, and provided that this is true, what the criteria are for your move and whether you have any rights to buy extra units.
One of the most essential disclosures in this area is whether you’re required to meet a target or perform in some other way as a method for guaranteeing either your entitlement to an exclusive region, or your entitlement to proceed in business by any means. This item will likewise disclose the franchisor’s reservation to itself of certain promotions and sales rights either within or outside any terrirory.
Item 13. Trademarks
This segment must identify every principal “mark” (trade name, trademark, service mark, service name or logotype) to be authorized to you, and must state whether the franchisee is required to alter or suspend utilization of a mark under any conditions.
Item 14. Patents, Copyrights and Proprietary Information
The section illuminates the licenses and copyrights held by the franchisor.
Item 15. Obligation to Participate in the Actual Operation of the Franchise Business
This section unveils whether the franchisee should actually take part in the operation of the franchise. On the off chance that there’s no such necessity, this section must state whether the franchisor prescribes such support, whether the individual who’s taking care of everyday operations must finish the franchisor’s training program, and whether this individual should possess an equity interest in the franchisee entity.
Item 16. Restrictions on What the Franchisee May Sell
By and large, the franchisor will require the franchisee to sell just the goods and services that are part of the franchised business. This area explains those confinements.
Item 17. Renewal, Termination, Transfer and Dispute Resolution
This section contains a cross-referencing table to the franchise agreement for 23 separate line items. It’s not the same as Item 9 in that it incorporates a compact proclamation or statement of the content of the specific franchise agreement and additionally the area of the franchise in the agreement.
Item 18. Public Figures
This segment requires the franchisor to unveil whether it uses a renowned individual to endorse the franchise. Provided that this is true, it must reveal the remuneration paid or guaranteed to the individual, the individual’s involvement in management or control of the franchisor and the amount of the individual’s investment in the franchisor.
Item 19. Financial Performance Representations
In layman’s terms, a Financial Performance Representation (FPR) is any report, chart, number juggling calculation, math formula or other portrayal that would permit a potential franchisee to figure out what they could earn. The only way the franchisor or its business staff or intermediaries can offer a FPR is if it’s expressed in this section. On the off chance that no such data is found in this section, any claims made by the franchisor as to your potential income are infringing upon the law.
Item 20. Outlets and Franchise Information
This section gives data with respect to existing outlets in the franchise framework. It covers outlet exchanges – and the status of franchised and company-owned outlets – for the past three financial years, and anticipated openings for the following financial year. It should likewise give data in regards to any reporting changes, any privacy conditions signed by franchisees amid the previous three financial years, and data about certain trademark franchisee affiliations.
Item 21. Financial Statements
The FDD must contain an exhibit with the franchisor’s examined financial statements for the past three financial years. On the off chance that the franchisee has been open less than three years, the FTC permits the franchisor to stage in audits. The franchisor is likewise required to give a different, audited financial statement for an organization controlling 80 percent or a greater amount of the franchisor.
Item 22. Contracts
This segment requires the franchisor to join to the FDD a copy of all form contracts the franchisee will sign, including the franchise agreement, leases, choices and purchase agreement.
Item 23. Receipt
In this last segment, the franchisor is required to incorporate as the last page of the FDD a form for the prospective franchisee to sign to recognize receipt of the FDD.