Franchise Disclosure Document: What You Need to Know

What is a franchise disclosure document and how is it different from a franchise agreement?

Here, we answer this question among other important aspects to be aware of when drafting an FDD or seeking legal advice to do so.

What Is a Franchise Disclosure Document?

A Franchise Disclosure Document (FDD) is a legal document that franchisors are required to provide to potential franchisees as part of the franchising process.

This is not a legal requirement in the UK, however there are still certainly advantages to having one since it allows the investor to know where they stand practically and legally.

However, as for the US, a Franchise Disclosure Document is legally required. The purpose of the FDD is to offer transparency and provide important information about the franchise opportunity, this allows for potential franchisees to make informed decisions on whether they will proceed with the franchise.

How Is It Different to a Franchise Agreement?

The difference between the two is simple, the purpose of a Franchise Disclosure Document is to provide prospective franchisees with detailed information about the franchise opportunity.

As mentioned, it offers a legal level of transparency and helps potential franchisees make informed decisions about whether to invest in the franchise. On the other hand, a Franchise Agreement’s purpose is to formulate a legally binding contract between the franchisor and the franchisee. It outlines the terms and conditions of the franchise relationship, including the rights and responsibilities of both parties.

Think of the FDD as the first step, then once the decision is made to invest into a franchise, the agreement is made to proceed via a Franchise Agreement.

Why a Franchise Disclosure Document Is Important & What It Includes?

What a Franchise Disclosure Document includes is precisely why it is so important.

An FDD includes crucial information, including:

• Information: A wide range of information related to the franchise system and its operations

• Risk Assessment: An FDD includes information about the franchisor's financial health, litigation history, fees, and other important aspects. This allows potential franchisees to assess the risks and potential challenges of entering into a business relationship with the franchisor.

• Professional Relationship: An FDD outlines the terms of the franchise relationship, including the franchisee's obligations, fees, territorial rights, and dispute resolution processes.

• Protection: The FDD offers legal protection to potential franchisees, it ensures that they have access to important information before making a significant financial commitment.

• Historical and Financial Information: The document typically includes the franchisor's audited financial statements, allowing potential franchisees to gauge the financial stability of the franchisor.

• Legal Compliance: Franchisors are required to adhere to specific formatting and disclosure requirements in the FDD, ensuring that potential franchisees receive standardised information that is presented in a clear and consistent manner.

• Due Diligence: The FDD encourages potential franchisees to perform due diligence, which may include seeking legal and financial advice, conducting background checks on the franchisor, and reaching out to current and former franchisees for their perspectives.

There are some other things that should be taken into consideration when it comes to an FDD, the timing must be secure. The FDD should be provided to potential franchisees at least 14 days before they sign the Franchise Agreement so they are provided with enough time to review and make a decision.

Ultimately, what makes an FDD so crucially important is the fact that it equips those interested in investing into a franchise with the information that they need with no ‘sugar coating’ so they can make an informed decision.

Which Key Executives’ Backgrounds Should Be Included?

Simply put, the key heads and decision makers of the franchise in question should be included.

Some of these titles may include, but aren’t limited to:

• Founders or Co-Founders
• Chief Executive Officer (CEO) or President
• Chief Operating Officer (COO)
• Chief Financial Officer (CFO)
• Chief Marketing Officer (CMO)
• Chief Development Officer
• Chief Legal Officer or General Counsel
• Chief Training Officer

The bottom line is, this information helps potential franchisees assess the leadership and expertise of the individuals driving the franchise system, again, allowing the potential investor to make informed decisions based on their employment history.

It's important for franchisors to ensure that the information about key executives is accurate and up-to-date, as this transparency can build trust and confidence with potential franchisees during the franchise disclosure process.

What Litigation Matters Are Not Required to Be Listed Under the Heading ‘Litigation’?

Within a Franchise Disclosure Document, the "Litigation" section is designed to provide potential franchisees with information on any past or pending legal matters involving the franchisor and those that are involved in the company in question.

That being said, not all litigation matters are required to be listed within this section. In fact, certain types of legal actions or disputes can be excluded from the FDD; some of these can include:

• Franchisee-Related Litigation
• Routine Employment Disputes
• Intellectual Property Registration
• Commercial Contracts
• General Business Disputes
• Actions Predating the FDD
• Minor Administrative Matters

Often, those that aren’t included are either private or minor legal matters but for further clarification, you should consult legal advice - particularly if you’re concerned about what is not Disclosed.

Is the FDD Mandatory for All Franchise Businesses?

Yes, in the United States an FDD is mandatory and lack of providing can result in legal disputes.

In the UK, no, an FDD is not mandatory for all businesses.

Does the Franchisor Need to List Affiliates Bankruptcy Details?

This isn’t always a yes or no answer, as it is dependent upon whether the affiliates bankruptcy is relevant and impactful on the potential investor.

The most important thing to do in this instance is to consult legal assistance to better understand if this is necessary on a case by case basis.

BBS LAW 

BBS Law, experts in Employment Legality, advises individuals, company owners, Human Resources professionals, in-house lawyers, entrepreneurs and senior executives at all levels in employment law matters which is how we bring you this insight into what you need to know about an FDD.

Download the Franchise Disclosure Template on DocPro: This Franchise Disclosure Statement (FDD) offers crucial insights into a franchise opportunity, detailing legal, financial, and operational aspects