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What is an FDD?

An FDD, or franchise disclosure document, should be carefully reviewed by any potential franchisee in the United States, in conjunction with their franchise attorneys. Before 2007, this legal document was known as the Uniform Franchise Offering Circular, or UFOC. The Federal Trade Commission (FTC) ordered the review and gave franchised companies one 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 file lawsuits in the event of an alleged violation of the franchise rule.

Still, each state has different franchise laws, which means that “private rights of action” can and do occur. 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 disclosures, who delivers them to franchisees, the method of delivery, and the timeframe franchisees have to review and submit reviews.

Keeping it legal

When a franchise agreement is entered into between two parties, the FDD is the underlying sales agreement. It is the foundation of what hopefully is 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 potential franchisee must have the FDD on hand for a minimum of two weeks before exchanging money or signing contracts. During this 14 day period, the franchisee may request FDD copies, provided they have submitted their formal franchise application.

These copies can be legally delivered by email, on a website, on disk, or on paper. Currently, 15 states require franchisees to receive FDD before completing any franchise agreement. Of those states, 13 require that the filing 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, the rights and requirements of a franchisee, and identifying potential roadblocks in the future.

What’s in an FDD?

Within an FDD, you will find comprehensive data about the company so that franchisees can make well-informed decisions. Twenty-three articles, or categories, are included with 21 addresses of information about the business. For example, earnings statements are an optional item that states that a unit earnings disclosure can be provided to the franchisee. However, Congress has been pondering the possibility of making this article a requirement rather than an option.

Additional elements include: The franchisor and parents, predecessors and affiliates; identity and business experience of key people; litigation history; bankruptcy; initial franchise fee; estimated initial investment of the franchisee; restrictions on sources of products and services; obligations of the franchisee; financing arrangements; territory; trademarks; patents, copyrights and proprietary information; obligation of the franchisee to participate in the actual operation of the franchise business; restrictions on goods and services offered by the franchisee; renewal, termination, repurchase, modification and / or transfer of the franchise agreement and dispute resolution; public 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 Franchise & Business Law Group to review your FDD and any other legal documents necessary for a smooth franchise buying experience.

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