If you’re thinking about buying a franchise, it’s important to understand the industry, terminology, fees and documents. As you do your research, you may be seeing the term FDD, which stands for franchise disclosure document and wondering, what is a Franchise Disclosure Document? Essentially, it’s a guide outlining details about a particular franchise brand to benefit prospective buyers. But there’s way more to it than that, so keep reading.
The Purpose of an FDD
The FDD is a critical document for you as a potential franchise owner and the franchisor because it clearly defines and “discloses” the brand’s legal structure and relationship between franchisor and franchisee. The FDD provides information about the franchisor and the franchise system, including the franchisor's history, the costs and fees associated with the franchise, the franchisee's obligations, and the terms of the franchise agreement.
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When you’re ready to buy a franchise, it’s important to not only know, “What is an FDD?” but to thoroughly read the document and understand it. The FDD spells out your obligation in this commitment as well as the details of the brand. It’s recommended to have an attorney look over the FDD and counsel you about its findings. The franchisor is obligated to provide the brand’s FDD to you at least 14 days before you sign your franchise agreement before completing the sale.
The purpose of the FDD is to give potential franchisees all the information they need about the franchisor and franchise system in order to make an informed decision about whether to invest in the franchise. The FDD is regulated by federal law and overseen by the Federal Trade Commission (FTC) and must comply with specific guidelines outlined in the FTC's Franchise Rule .
The Specifics of the FDD
To analyze it even further, when determining, “What is an FDD?” the International Franchise Association briefly discusses the 23 items , or sections, of the FDD disclosing vital information about the franchise. Some of the key information in these items includes:
- Franchisor's background: Item 1 of the FDD must include information about the franchisor's business history, experience, and other relevant background information.
- Litigation and bankruptcy history: Item 3 of the FDD must disclose any litigation history involving the franchisor, its officers, directors, or affiliates. Item 4 includes any bankruptcy filings.
- Franchise fees and other costs: Item 7 details all startup costs, while Items 5 and 6 also separately detail many of the upfront fees. The FDD must provide detailed information about the franchise fees, royalties, and other costs associated with the franchise.
- Financial performance representations: Item 19 is the only item not required to be included in the FDD. However, if it is included, this is where the franchisor makes any claims about the financial performance of the franchise during its most recent fiscal year. Unit economics are sometimes included.
- Franchisee obligations and responsibilities: Item 9 describes the franchisee's obligations and responsibilities under the franchise agreement.
- Intellectual property and proprietary information: Items 13 and 14 must disclose information about the franchisor's trademarks, patents, copyrights, and other intellectual property.
- Territory restrictions: In Item 12, the FDD must describe any territory restrictions or exclusivity provisions that apply to the franchise.
- Renewal, termination, and transfer: Item 17 provides information about the franchise agreement's renewal, termination, and transfer provisions.
By providing this information in a standardized and transparent way, the FDD helps potential franchisees assess the risks and benefits of investing in the franchise system. The FDD also provides a legal framework for the relationship between the franchisor and franchisee and helps to protect both parties' rights and interests.
This is Not a Contract
What is an FDD? Not a contract. The FDD is not a negotiable instrument. It’s a legal document, updated annually, that provides detailed information about the franchise system and the franchisor's business. While the FDD contains important information about the franchise system, it does not establish any contractual obligations between you and the franchisor. Instead, the FDD is intended to be used as a tool to help the parties negotiate and enter into a franchise agreement that is mutually beneficial.
Once you decide to invest in the franchise, you’ll sign a separate franchise agreement that establishes the contractual relationship between you and the franchisor. The franchise agreement will incorporate many of the terms and conditions outlined in the FDD but will also include additional provisions that are specific to the individual franchise relationship.
By law, the FDD must be written in clear and concise language that is easily understandable by potential franchisees. The FTC also requires that the FDD be updated annually to ensure that the information is current and accurate.
The ServiceMaster Restore Franchise Opportunity
At ServiceMaster Restore, we want our franchise owners to be comfortable understanding our FDD and all parts of our restoration franchise opportunity . We are transparent about our business because we want to create and maintain a great relationship with our partners. And we want our franchise owners to be satisfied with their ownership decision.
We are a commercial and residential restoration service company backed by a national franchise network with over 65 years of experience. Our success is based on our commitment to delivering total customer satisfaction at a time when people need us the most — when disaster strikes. We offer everything from weather damage restoration to fire and smoke damage repairs to mold remediation.
As a franchise owner, you are well-trained not only about the business side of operations but also concerning damage restoration. You’ll benefit from our comprehensive training within our state-of-the-art facility, as well as ongoing training for you and your staff.
If you’re ready to get started in a lucrative industry helping your community, fill out the form and we’ll be in touch.