Franchise Disclosure Document

Introduction

Many countries have implemented legislation to govern franchising. In the United States, for example, potential franchisee owners must adhere to the Federal Trade Commission's ("FTC") amended version of the FTC Franchise Rule, which necessitates franchisees to make twenty-three specific disclosures in the Franchise Disclosure Document ("FDD"), which must be updated regularly. In addition, fifteen states in the United States have their disclosure regulations for potential franchisee owners.

The Franchise Disclosure Document (FDD) is a thorough document supplied by the franchisor that describes multiple aspects of a certain franchise in great detail. Previously, the FDD was known as a Uniform Franchise Offering Circular (UFOC).

The 23 Sections That One Must Include in FDD

The FDD is split into 23 sections, each of which the prospective franchisee must review before signing. The FDD offers critical information for potential franchisees considering a large investment.

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The following sections, in the order shown below, must be included in every document:

1. The franchisor and any parents, predecessors, and affiliates
2. Business experience
3. Litigation
4. Bankruptcy
5. Initial fees
6. Other fees
7. Estimated initial investment
8. Restrictions on sources of products and services
9. Franchisee’s obligations
10. Financing
11. Franchisor’s assistance, advertising, computer systems, and training
12. Territory 
13. Trademarks
14. Patents, copyrights, and proprietary information
15. Obligation to participate in the actual operation of the franchise business
16. Restrictions on what the franchisee may sell
17. Renewal, termination, transfer, and dispute resolution
18. Public figures
19. Financial performance representations
20. Outlets and franchisee information
21. Financial statements
22. Contracts
23. Receipts

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Why Do We Need FDD?

The FDD is a Federal Trade Commission requirement (FTC). The FTC requires that a Franchise Disclosure Document (FDD) be supplied to potential franchisees no later than 14 days before any formal contract is signed to ensure that they have all of the information required to make an informed judgment.

The 14-day timeframe begins when a formal receipt is signed. The receipt merely acknowledges that one might have received the FDD and does not imply any obligation on the other's behalf.

The FDD does not require government approval. However, in other states, the FDD must be registered and meet certain approval requirements. Some of which are California, Hawaii, Illinois, Maryland, New York etc. Other states do not need the franchisor to register the FDD, but they demand the franchisor file the FDD with the state to sell franchises there. Some of these are Connecticut, Florida, North Carolina, South Carolina, Texas etc.

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Importance of FDD in India

The FDD protects both parties. It thoroughly discusses all financial concerns so that the franchisee is not surprised by any unexpected fees later. Since franchises have diverse approaches, franchisees need to know exactly what to expect before signing a contract. The contract can protect the franchisor from risks and liability if the investment fails and eventually be able to collect any amounts owed to them.

Since February 2020, 34 jurisdictions have enacted some type of franchise-specific legislation or regulation requiring the issuance of a disclosure document to a potential franchisee even before the franchise is purchased. A franchisor is not subject to any pre-contract disclosure requirements or any statutory responsibility to offer any information to a potential franchisee under Indian law. In India, there is a general rule that parties owe each other a duty of good faith and fair dealing, which might require pre-sale disclosure. This makes franchising in India a dangerous business, thus a franchisee should conduct comprehensive due diligence on the franchise and be doubly sure before signing a franchise agreement.

Is Review of FDD Important?

Owning a franchise is a significant investment. One should examine the Franchise Disclosure Document (FDD) from beginning to end. Because a franchise normally involves a ten-year commitment, one should take their time and put in the necessary effort.

Because the franchise disclosure document cannot be modified, some people do not want to hire a lawyer to prepare and review it. However, it is equally critical to retain the services of a lawyer because: a franchise lawyer understands what might go wrong and where to check for warning signs. A skilled lawyer can advise you on how to protect yourself and when to walk away in rare circumstances. Years of experience can be brought to the table by a franchise lawyer. He or she will explain how a franchisee operates and provide you with important advice on how to acquire a franchise.

The purpose of the FDD is to provide information that can be used in real-time interactions. While reading the long document, the nuances may be overlooked, particularly when determining how to buy a franchise. The FDD allows potential franchisees to evaluate and determine whether or not to purchase the franchise.