The relationship between a franchisor and a franchisee can be a complex one. As such, it is regulated by the FTC's Federal Franchise Rule. Among others, a franchisor must disclose all notable details regarding the franchise before a franchisee is to make a significant investment.
This is achieved through a comprehensive Franchise Disclosure, which must be further filed and registered with the corresponding state's franchise examiner.
A Franchise Disclosure is a comprehensive document outlining the roles of both the franchisor and franchisee. It must be given to anyone who wants to buy a US franchise, and it is a part of the due diligence process that occurs before the commitment.
This document contains 23 sections a franchisee must review and agree to before signing. A Franchise Disclosure affords a potential franchisee the ability to make an informed decision based on accurate and faithful data.
Depending on your state, a Franchise Disclosure may also be known as a Franchise Disclosure Document or FDD, the most widely-used acronym related to this document and commonly used in a franchise's legal framework.
Any prospective franchisee must receive a Franchise Disclosure. The franchisee assumes a right to acquire a copy of the document when the franchisor accepts their application. The franchisor must also supply the Franchise Disclosure in at least 14 days before the franchisee is to sign the agreement and exchange money with the franchisor.
This is so the franchisee has enough time to review the disclosure and negotiate with the franchisor as appropriate. If any changes occur favoring the franchisee, the franchisor is not required to update the FDD, but only the franchise agreement.
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A Franchise Disclosure is a document of extensive detail and comprehensiveness. The franchisor must be careful in its preparation to present with great clarity all relevant information. For this reason, making use of a professional Franchise Disclosure template is highly recommended.
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A Franchise Disclosure has 23 items that the franchisor must address:
Franchisor details: The franchisor's corporate information, including that of all parent companies and affiliates.
Business experience: Information about the management team of the franchisor.
Litigation: All on-going and previous litigations as involved the franchisor's predecessors, affiliates, and management team members.
Bankruptcy: Information related to potential bankruptcy of the franchisor, including affiliates and predecessors.
Initial fees: Disclosure of all upfront fees to be collected from the franchisee.
Other fees: All additional fees that must be paid at the franchise agreement stage.
Estimated initial investment: Estimated expenses the franchisee would incur when establishing a franchise location.
Restrictions on Sources of Products and Services: The franchisee must purchase all products and services from the franchisor.
Franchisee's Obligations: All of the franchisee's responsibilities in table form.
Financing: A list of financing options available to the franchisor for the initial fees.
Assistance, Advertising, Computer Systems, and Training: The franchisor's service and training, including the advertising and software requirements that the franchisee must meet.
Territory: Information about the protected territory that the franchisee might be awarded.
Trademarks: A listing of the franchise's trademarks and related legal matters.
Patents, Copyrights, and Proprietary Information: All copyrights and patents belonging to the franchise system.
Obligation to Participate in the Actual Operation of the Franchise Business: A listing of all responsibilities related to the franchisee's day-to-day operations.
Restrictions on What the Franchisee May Sell: All products and services that the franchisee can and cannot sell.
Renewal, Termination, Transfer, and Dispute Resolution: Legal obligations and rights related to the renewal, transfer, and termination of the franchise business.
Public Figures: Disclosure of any celebrities that promote the franchise.
Financial Performance Representations: Disclosure of the franchisor's Financial Performance Presentations, if any.
Outlets and Franchisee Information: A summary of the franchise's corporate outlets and future projections.
Financial Statements: Copies of the franchisor's financial statements.
Contracts: Disclosure of all the contracts to be signed by the franchisee.
Receipts: A page signed by the franchisee confirming the receipt of proper disclosure.
Distributorship: The right that the franchisor grants for the sale of its products.
Protected (Exclusive) territory: A geographic area assigned exclusively to the franchisee.
Franchise fee: The initial cost to be collected from the franchisee to the franchisor.
Copyright: The legal right to reuse intellectual property and licensing rights owned by the franchisor.
Arbitration: A method of dispute resolution outside of the court systems.
Capital required: The initial investment required of the franchisee to open for business.
Operating principal: A person authorized by the franchisor to make decisions for the franchisee.
Registration states: All of the states that require a franchisor to issue a Franchise Disclosure.
Trademark: The logo, name, and mark identifying the franchise.
Master Franchise: A relationship where the master franchisee can sub-franchise to others within the allocated geographic territory.
Both the franchisor and franchisee must sign a Franchise Disclosure before entering into any legally binding deals, such as a franchise agreement. The franchisee must carefully review each item before signing, of which the franchisor is not obligated to amend.
If you are a franchisor, you must submit the disclosure within the defined time frame after you have accepted a franchisee's application. Make sure all the information contained is truthful and accurate.
As a franchisee, you must review the Franchise Disclosure thoroughly before agreeing to join the franchise. After signing the disclosure, which acknowledges your acquiescence, you can close the deal with the franchisor and conduct your franchise location following all the disclosure items.
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