Franchise Regulations and the FDD
Franchise regulations are in place for the benefit of the individual considering buying a franchise. It is important to understand these regulations.
Federal law requires that a franchise prospect receive a current copy of the 75-150 page document known as the Franchise Disclosure Document (FDD) at the first meeting with a representative of the franchise company. A current copy of the FDD must be in the possession of the prospect for 14 calendar days before the prospect may sign any commitment or make any deposits. Finally, the franchise contract, with all blanks filled in, must be in the possession of the prospect for five business days before they can sign it.
Below you will find the definition of a franchise, courtesy of the Federal Trade Commission, and the table of contents of the FDD.
The Table of Contents of the FDD:
- Franchisor, predecessors, affiliates the officers and their business experience
- Litigation and bankruptcy
- The estimated initial investment and all fees including the initial franchise fee, ongoing royalties, advertising fees, site fees, transfer fees, etc.
- Restrictions on the sale of products, services, and also on their sources
- Franchisor’s obligations and the franchisee’s obligations
- Available financing and territory rights
- Obligation to participate in the operation of the business
- Renewal, termination, transfer and dispute resolution
- Earnings and/or sales claims
- List of outlets and franchisees including all who left in the last year, and three years of open/closed units
- Audited financial statements of the franchisor
- Franchise agreement, leases and other documents
- Receipt of the Circular to be signed by the prospect
The Federal Trade Commission’s definition of a franchise is…”An agreement for consideration by which a person permits the distribution of goods or services under his trademark, service mark, or trade name, during which the grantor retains control over others or renders significant assistance to others.”