What is a Franchise Disclosure Document (FDD)?

What is a Franchise Disclosure Document?

The Franchise Disclosure Document (the FDD) was previously known as the Uniform Franchise Offering Circular (UFOC), and is the single most valuable document for understanding a franchise system from the ground up.

What information is provided in a Franchise Disclosure Document?

The content-rich FDD offers a privileged window into nearly every aspect of a franchise concept, and typically includes the following information:

• Full text of the systems' Franchise Agreement
• Detailed breakdowns of all franchise fees
• Explanations of the franchise's start-up capital and ongoing cash requirements (including store build-out costs, ongoing royalty payments, and marketing expenses)
• Descriptions of financing options and assistance offered by the franchisor or affiliated third-parties, if any
• Disclosure of designated and approved suppliers, franchisees' mandatory purchases, and any rebates received from vendors as a result of franchisee purchases
• Overviews of site selection requirements and exclusivity of territory rights for franchisees, if any
• Descriptions of initial training program modules and ongoing support
• Operating manual length and table of contents (in most cases)
• A detailed list of current and projected units in the system, broken down by all 50 states
• Names and contact information of former and current franchisees in the franchise system (great for speaking with those who know the system best, marketing to franchisees, or conducting research surveys)
• Historical franchise financial performance figures (critical for building financial models and business plans)
• Earnings claims tables (for franchisors supplying Item 19s)
• Disclosures of any affiliated franchise systems, brands, entities, parent corporations, or subsidiaries
• Franchise litigation and bankruptcy history
• Profiles and conflict-of-interest disclosures of all key executives

Search for Franchise Disclosure Documents to download right here with FranchiseHelp.com.

How is an FDD organized?

The information in the FDD is divided into a cover page, table of contents, Franchise Agreement, and 23 categories (items) of rich operational and financial data, as follows:

• FDD Items 1-2 provide background information on the franchise concept, including a list of management team members and key employees.
• FDD Items 3-4 provide information on past bankruptcy filings as well as past and/ or current litigation that the franchise may be involved in.
• FDD Items 5-7 provide the financial details related to initial fees, ongoing royalties and an outline of all costs related to owning the franchise.
• FDD Items 9, 11 and 15 provides you with a deep understanding of all the franchisor and franchisee contractual obligations.
• FDD Item 17 describes the process of selling or terminating the franchise and any dispute resolution provisions.
• FDD Item 19 (when applicable) provides a summary of store-level (unit-level) financial performance.
• FDD Item 20 provides listings of (and contact information for) existing and former franchisees in the system - an invaluable tool for research and due diligence.
• FDD Item 21 reveals the franchisor's financials, including audited balance sheets and income statements for the 3 previous fiscal years (when available).
• Full text of the Franchise Agreement (the actual contract between the franchisor and franchisee).
• ...and much more valuable, detailed information about the franchise.

Who Buys Franchise Disclosure Documents?

FDDs are most often purchased by:

• Prospective franchise owners (franchisees) looking to compare financial performance between franchise concepts
• Equity research analysts and industry analysts seeking a deeper understanding of a particular franchise system or category
• Lawyers, bankers, private equity professionals, and others looking to conduct due diligence on a franchisor or its competitors

Which states require FDDs?

Know your state. According to the Federal Trade Commission, California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin require that franchisors present their FDD to prospective franchisees at least 14 days before any franchise agreement is signed and before any funds change hands.

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