Any potential franchisee in the United States, along with their franchise attorneys, should carefully review an FDD, or franchise disclosure document. Prior to 2007, this legal document was known as the Uniform Franchise Offering Circular, or UFOC. The Federal Trade Commission (FTC) ordered the review and gave franchisees a year to make the change. Since 1979, the FTC has monitored franchise sales in the country, and the FDD ensures that only the state and federal government can bring laws for alleged violations of the franchise rule.
Still, each state has different franchise laws, which means that “private rights of action” can take place. Lawsuits can be filed if a franchise has allegedly violated the disclosure laws required by the FDD. Under the franchise rule, the specifications guide who writes the disclosures, who delivers them to franchisees, the method of delivery, and the amount of time franchisees have to review and submit revisions.
keep it legal
When a franchise agreement is made between two parties, the FDD is the underlying sales contract. It is the foundation of what we hope will be a long and healthy relationship between the franchisee and the franchise business. Unless both parties agree, this contract cannot be modified (and this is rare). Under current FTC law, a prospective franchisee must have the FDD in hand for a minimum of two weeks before exchanging money or signing contracts. During this 14-day period, the franchisee can request copies of the FDD, provided they have submitted their formal franchise application.
These copies can be legally delivered by email, on a website, on a disc, or in hard copy. Currently, 15 states require franchisees to receive FDD prior to the termination of any franchise agreement. Of those states, 13 require the filing to be made public. However, even for those who do not live in a state that requires FDD, the FDD can serve as a great tool when researching franchise law, franchise rights and requirements, and to identify any potential roadblocks.
What’s in an FDD?
Inside an FDD, you will find comprehensive data about the company so that franchisees can make well-informed decisions. Twenty-three items or categories are included, of which 21 address information about the business. For example, earnings claims are an optional item that provides that a disclosure about the unit’s earnings may be provided to the franchisee. However, Congress has been considering making this article a requirement rather than an option.
Additional elements include: The franchisor and its parents, predecessors and affiliates; identity and business experience of key persons; litigation history; bankruptcy; initial franchise fee; estimated initial investment of the franchisee; restrictions on the sources of products and services; obligations of the franchisee; financing agreements; territory; trademarks; patent, copyright and proprietary information; franchisee’s obligation to participate in the actual operation of the franchise business; restrictions on the goods and services offered by the franchisee; renewal, termination, repurchase, modification and/or transfer of the franchise agreement and dispute resolution; audience figures; financial performance representations; list of franchise outlets; Financial statements; contracts; and acknowledgment of receipt.
Like any legal document, the FDD can be confusing, so it is always best to work with a business attorney. Contact the Franchise & Business Law Group to review your FDD and any other legal documents necessary for a smooth franchise buying experience.