If you’ve ever bought a home, the seller was required to provide you with a seller’s disclosure.
Likewise, in franchising the federal government requires a franchisor to provide a Franchise Disclosure Document to a prospective franchisee. It includes 23 items that provide the prospective buyer valuable information about the franchise. It must be provided to prospective franchisees at least 14 days before they sign a contract with the franchisor. Regulated by the Federal Trade Commission, the prospective franchisee must sign for the FDD when they receive it and 14 days must pass until you can purchase the franchise. This is for your protection.
The FDD contains information essential to potential franchisees about to make a significant investment. Each document is required to contain the following sections in the order specified below:
1. The Franchisor. Provides background information about the franchisor, including how long it has been in business.
2. Business Experience: Identifies directors, principal officers and other key executives.
3. Litigation: This item discloses any prior litigation, including past or current lawsuits that involve or impact the franchisor.
4. Bankruptcy: Discloses whether the franchisor, its affiliates or any of its executives have filed for bankruptcy.
5. Initial fees: Describes the costs involved in starting and operating the franchise.
6. Other fees: Lists any other recurring fees or payments charged by the franchisor beyond the initial investment.
7. Estimated Initial investment: Discloses all expenses the franchisee will be required to establish the franchise.
8. Restrictions on Sources of Products and Services: Details restrictions on the source of products or services.
9. Franchisee’s Obligations: Reference table indicating where in the franchise agreement obligations can be found.
10. Financing: Describes whether the franchisor offers financing, and if so, the terms and conditions.
11. Franchisor’s Assistance, Advertising, Computer Systems, and Training: Explains the support the franchisor will provide.
12. Territory: Describes if there is an exclusive territory and whether it can be modified.
The Franchise Disclosure Document (FDD) is a legal document that all franchisors in the United States are required to provide to potential franchisees.
13. Trademarks: Provides information about the franchisor’s trademarks, service and trade names.
14. Patents, Copyrights, and Proprietary Information: Describes how the patents and copyrights can be used.
15. Obligation to Participate in the Actual Operation of the Franchise: Details whether the franchisee is required to participate in the actual operation of the business.
16. Restrictions on What the Franchisee Can Sell: Explains restrictions on what products and services the franchisee can provide to customers.
17. Renewal, Termination, Transfer, and Dispute Resolution: Describes the renewal, exit and sales processes, and methods of dispute resolution.
18. Public Figures: Covers anyone whose name or physical appearance is associated with the franchise—celebrities, for example.
19. Financial Performance Representations: This item is not required, but most franchises choose to provide information about historical sales and earnings.
Understanding the FDD is crucial as it can help you assess the viability of the franchise, determine if it’s a good fit for you, and navigate any potential risks.
20. Outlets and Franchisee information: Provides locations and contact information for existing franchisees, as well as growth and owner turnover in the franchisor’s system.
21. Financial statements: Provides the franchisor’s three most recent audited annual financial statements.
22. Contracts: Provides all of the agreements the franchisee must sign.
23. Receipts: Prospective franchisees must sign a receipt that they received the FDD.
Read this story and more in the Vetrepreneur® 2025 Franchising Guide for Veterans.
