Before a franchisee or seller puts their business on the market they should read their Franchise Disclosure Document or FDD. The FDD will state any fees the franchisor charges to process the sale of the franchise to a new buyer and hopefully outline any training the buyer needs to attend. Some franchise agreements are not friendly to the franchisee or franchise buyer so know the rules before putting the franchise on the market so disclosures can be made correctly to a buyer.
The FDD (Franchise Disclosure Document) is the document that Federal law requires franchise companies' franchisors, to provide to prospective purchasers of a franchise before the agreement is signed and the purchaser pays money to the franchisor, becoming a franchisee of a fast food outlet, retail store, service firm or other kind of business in a franchisor's business system. Until July 2007, the disclosure form was called the UFOC (Uniform Franchise Offering Circular). Its use was required in connection with all franchise offerings under rules enforced by the Federal Trade Commission. The law was created in 1979 after many complaints about predatory practices by some companies exploiting the booming interest in franchise ownership by American consumers.
The FDD, an updated version of the UFOC, must be provided by a franchisor at least 14 days before the prospective franchisee is required to pay any money or sign any contracts. Among key requirements for the FDD are:
--Disclose the names of any businesses and principals having ownership of the franchise company, defined more explicitly for franchisors with publicly traded stock;
--Disclose names, business experience and litigation history - if it pertains to criminal or civil actions related to business dealings--of executives and principals of the franchise company;
--Provide details about the franchise including years in business, legal requirements, licenses and permits needed to operate the business;
--Disclose the amount of initial investment required and the amount of franchise fees and other costs imposed by franchisor, such as for training and advertising;
--Provide details about the privileges and responsibilities of franchisees such as definition of territory, limitations on purchasing, methods and rules regarding operation of the business and requirements pertaining to use of trademark;
--Provide list of franchise outlets, information about terminated, cancelled or non-renewed franchises, names of any former owners, over the past five years, of an existing outlet offered to the purchaser;
--Disclose substantial financial information about the franchisor including audited financial statements;
--Disclose sizes and average gross revenues of franchises in the system along with information about relationships between location and financial performance;
--While there is no requirement to disclose net earnings of franchises, if such information is provided it must be accompanied with details substantiating any claims.
