Decoding the Franchise Disclosure Document:

The Franchise Disclosure Document (FDD) is a critical part of the franchising process. That’s because it outlines much of what you might need to know about a franchisor before signing on the dotted line, from fees and ongoing obligations, to franchisor litigation history.

For entrepreneurs exploring a new franchise opportunity, it’s important to understand the FDD in order to make a confident, informed business decision. It is also a legally required document, so it’s a good idea to review an FDD with a professional, such as an attorney, who has working knowledge of the franchise industry.

What Is a Franchise Disclosure Document (FDD) and Why Does it Matter?

A Franchise Disclosure Document is a document that franchisors must provide to potential franchisees, as required by the Federal Trade Commission (FTC), before a franchisee enters into a franchise agreement with the franchisor.

The franchise disclosure document aims to provide clear, comprehensive information about a franchise business to help prospects evaluate their potential investment.

The information within the FDD can help potential franchisees:

• Understand general franchise agreement terms
• Compare multiple franchise opportunities
• Identify potential risks or red flags
• Ask the franchisor informed questions
• Review franchisee operational autonomy
• Understand provided systems and support
• Evaluate whether the franchise system aligns with their long-term goals
• Assess scalability and sustainability of the system

Starting a franchise is much like starting any other business – you’ll need clear and comprehensive information to make decisions that are strategic, insightful, and intentional. That’s where the Franchise Disclosure Document comes into play.

You might read one franchisor’s FDD and immediately spot some areas of misalignment. That could be a good opportunity to pause and reflect. Or you could read another that sounds like a perfect fit and choose to move forward with confidence.

Either way, you’ve strategically evaluated and acted on key information. That’s the power of the FDD!

What’s Inside a Franchise Disclosure Document?

So, what exactly does an FDD include?

The Franchise Disclosure Document is made up of 23 required sections, known as “Items.” These items cover a range of disclosure topics, from a general description of the franchise business, to an estimate of the initial franchise investment, and ongoing fees, to franchisor and franchisee responsibilities.

Here’s a closer look at the FDD Items:

Items 1-4: Getting to Know the Franchise Business

These Items help you understand who you’d be doing business with, offering insight into the franchisor’s credibility, stability, and track record.

They include the franchisor’s:

• Business history and experience
• Parent companies and affiliates
• Litigation history
• Bankruptcy disclosures

Items 5-7: Franchise Fees and Startup Costs

These Items outline the financial commitment required to get started and operate the franchise.

Here, you’ll find:

• Initial franchise fees
• Estimated initial investment
• Ongoing fees such as royalties

Items 8-12: Operating Requirements, Support, and Territory

These Items clarify certain operational requirements and what support the franchisor provides.

They address:

• Required suppliers and systems
• Financing options offered by the franchisor (if any)
• Training programs, advertising requirements, and ongoing marketing support
• Computer systems and technology requirements
• Territory definitions and any exclusivity provisions

Items 13-15: Brand Assets and Owner Involvement

Next, you’ll review the brand and intellectual property you’d be licensing — and the role you’re expected to play as a franchise owner.

These Items explain:

• Trademark and copyright ownership
• Franchisee participation in operation of the franchise

Items 16-18: Franchise Relationship Considerations and Public Figures

These Items cover important structural and contractual aspects of the franchise relationship.

They may include:

• Restrictions on the products or services that franchisee may sell
• Renewal, termination, transfer, and dispute resolution terms
• Any public figures associated with the franchise

Item 19: Financial Performance Representations

Item 19 is where a franchisor may disclose representations about its financial performance. This Item can be helpful to a franchisee in assessing a franchisor’s financial condition.

Item 19 may include:

• Historical performance data
• Revenue or earnings figures
• Performance ranges across the franchise system

Items 20-23: Franchise System Activity and Required Attachments

The final Items provide a broader view of the franchise system as a whole.

These Items include:

• Information regarding the number of franchise outlets, including openings, transfers, and closures
• The franchisor’s financial statements
• Receipts which confirm delivery of the FDD

How To Tackle Review of the Franchise Disclosure Document

FDDs can be lengthy and seem overwhelming. But it’s important to carefully review the FDD.

To help a smooth process of FDD review, it’s a good idea to:

• Set aside plenty of time to review
• Flag any unclear language or inconsistencies
• Note any questions you may have for the franchisor as you work through the document
• Consult with a relevant professional such as an attorney and/or financial advisor

The FTC also offers some helpful resources on diving into franchise disclosures.

Wrapping Up: Understanding the Franchise Disclosure Document

The franchise disclosure document can be dense and, at times, even intimidating. But franchise ownership is a big decision. So it’s critical that you understand just what you’d be agreeing to.

By building a foundation of knowledge, familiarizing yourself with the contents of the FDD, reading it strategically, and understanding your goals well ahead of time, you’ll be better prepared for franchise ownership.

Key Takeaways

• The Franchise Disclosure Document (FDD) is a required legal document that must be disclosed to prospective franchisees during the sales process. It’s designed to help prospective franchisees evaluate a franchise opportunity before signing a contract or paying a franchisor money.
• The FDD aims to provide the franchisee with clear information about the franchise system and help the franchisee identify potential risks or red flags, and to ask more informed questions.
• Every Franchise Disclosure Document is organized into 23 required “Items.” Together, these Items cover the full scope of the franchise relationship.
• Prospective franchisees should review the FDD strategically and thoughtfully. That includes setting aside focused time, flagging unclear or inconsistent language, writing down questions as they arise, and comparing multiple FDDs when applicable.
• Because the FDD is a legal document with long-term implications, it’s wise to review it with an experienced professional such as an attorney and/or financial advisor before making any commitments.
• Finally, approaching the FDD with a clear understanding of your personal business goals — including your desired day-to-day involvement, acceptable risk level, long-term definition of success, and financial comfort zone — will help you determine whether a franchise opportunity is truly the right fit.