One of the legal requirements before a franchisee may engage into a franchise agreement with a prospective franchisee is a Franchise Disclosure Document (FDD). The FDD is an essential document that must indicate pertinent information regarding the franchisor and its business such as its legal history, company structure, financial status and agreements, existing franchisees, and many others.
What is in it for the Franchisee?
FDD helps a prospective franchisee make an informed decision when entering a franchise contract. It basically provides an overview of the status and experience of the franchisor, the respective obligations and rights of the parties under the franchise, as well as the recourse of the parties in case of disputes. More particularly:
Franchisor’s identity and all related interests
– The franchisor must disclose not only its corporate information, but also the corporate information of its parent, affiliates, and subsidiaries if there are any.
Franchisor’s business experience
– The franchisor must disclose information about its corporate officers and management staff.
– The franchisor must disclose some of the litigation that it has been involved with. It must likewise disclose those of its subsidiaries, affiliates, predecessors, and of its corporate officers and management staff in their individual capacity.
– The franchisor must disclose whether or not the franchisor, its related interests, and/or its corporate officers and management staff has previously filed for bankruptcy.
– The franchisor must disclose all initial fees that a franchisee must pay to the franchisor before the franchisee can finally open for business. These may include opening-inventory and equipment costs.
– In addition to the upfront costs, the franchisor must also disclose all fees that a franchisee must pay during the life of the franchise agreement. These may include royalties, marketing, technology, training, and other similar costs.
Estimated Initial Investment
– The franchisor must include an estimate of the cost for a franchisee to establish its franchised business. It must include everything from the construction and equipment costs to reserve capital for the first few months of operation.
– The franchisor must disclose the products and services that the franchisee must exclusively purchase from the franchisor or its designated suppliers. Additionally, the franchisor must disclose its profits from selling exclusive supplies and products to franchisees. The franchisor must also disclose what products or services the franchisees may not offer to the market.
– The franchisor must disclose all of the franchisee’s obligations under the agreement from the very beginning up to the termination of the contract.
– The franchisor must disclose whether it offers financing as to any applicable in connection with the franchised business.
– The franchisor must disclose the type of assistance, training, as well as the advertising requirements from the franchisee. The franchisor must likewise disclose the required computer and software systems that the franchisee must procure.
– The franchisor must disclose whether or not the franchisee will be guaranteed an exclusive territory. If so, the franchisor must also disclose how the territory will be determined.
– The franchisor must disclose the trademarks, patents, copyrights, and other intellectual properties connected with the franchise. The disclosure must include their registration status and any pending dispute surrounding them.
– The franchisor must disclose the obligations of the franchisees, including the number of hours required from the franchisee, in running the operations of the business franchise.
Franchise Term, Termination, Assignment, and Dispute Resolution
– The franchisor must summarize the conditions related to the renewal and termination of the agreement. It must also disclose whether the franchisee may assign its rights to the franchise. The franchisor must also disclose how disputes must be resolved between the parties.
– The franchisor must disclose personalities that have been hired to promote the franchise system if any.
Financial Performance Representations
– The franchisor must disclose whether or not it will provide Financial Performance Representations. If it does, it must provide the franchisee specific level or range of actual or potential sales, income, gross or net profits, or “break-even” figures.
Outlets and Franchisee Information
– The franchisor must disclose a summary of its franchised and corporate outlets over the past couple of years and a projection of any future opening.
– The franchisor must disclose and include copies of its financial statements.
– The franchisor must attach to the Franchise Disclosure Document a sample of the franchisor’s standard franchise agreement and all related agreements thereto.
– The FDD must have a receipt page where a franchisee must sign to confirm and prove the Franchise Disclosure Document has been accordingly provided.