Franchise Disclosure Document (FDD)
The disclosure document typically used to comply with the Rule is called a Franchise Disclosure Document (FDD), which contains categories of information about the franchise's operations such as:
bankruptcy and litigation history of the company
how long the franchise will be in effect
a financial statement of the franchisor, and
Before you invest in any franchise you should:
(a) Get a copy of the franchisor’s Franchise Disclosure Document (FDD)
(b) Receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor
(c) Get a copy of the franchisor’s FDD before you spend any money to investigate the franchise offering
The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you and keep a copy for reference.
Most important items in the Franchise Disclosure Document (FDD)
The International Franchise Association considers the six sections of the Franchise Disclosure Document to be critical pieces of information to help you evaluate a potential franchise for purchase:
Item 7: Costs. Some of these costs are averages or estimates and may vary in your area. Talk to other franchisees who have been in the system for a year or more to see:
(a) How much money they needed in the beginning until they became profitable.
(b) How much they were able to draw from the business to support themselves.
Item 11: Franchisor's obligations. Be sure you understand the services you will get before you open:
(a) site selection
(c) development assistance
Be sure you know what services you will receive for your grand opening (marketing, advertising, field support) and what services you will receive after you begin operating your business (training, advertising, operations)
Pay particular attention to those services the franchisor is obligated to provide and the services they may provide.
Item 17: Renewal, termination, transfer, and dispute resolution.
Take your time to understand what rights you will have and what rights you are giving up. Pay particular attention to any non-compete provisions and your obligations when the franchise relationship ends.
Item 19: Financial performance representations.
(a) Only 30 to 40 percent of all franchisors provide prospective franchisees with information about financial performance.
(b) The next best thing to do is to talk to existing franchisees about sales and earnings potential.
Item 20: Outlets and franchisee information.
(a) Examine how many units the franchisor has taken back and resold.
(b) If this number is high, this could indicate churning (when the franchisor takes back failed locations and markets them over and over.)
(c) Pay attention to the contact information of the franchisees who have left the system, These are people you definitely want to talk to.
Item 21: Financial statements.
(a) Financial statements are the track record of the franchisor. You should be given copies of the franchisor's last three years' financial statements.
(b) Take them to an accountant who specializes in franchising to evaluate.
(c) Remember that the financial condition of the franchisor not only affects its ability to run a financially successful operation in the future, but it also determines whether it may go under and you will be left "holding the bag."
(d) The two key financial statements to focus on are the balance sheet and the income statement. Make sure they are audited.
Item 22: Contracts.
Make sure that all the agreements listed are attached to the FDD-and read every one of them.
Steps to Register a Franchise Disclosure Document (FDD)
Under the franchise laws, a franchisor must issue and properly disclose Franchise Disclosure Document (FDD) before offering or selling a franchise. At the federal level and, in many states, there is no requirement to register an FDD.
In the 13 states referred to as the franchise registration states, a franchisor must first register its FDD with the state franchise regulator before offering or selling a franchise in the state, these states are:
- New York
- North Dakota
- Rhode Island
In the 9 states referred to as the franchise filing states, a franchisor must first file a notice with the designated state regulator before offering or selling a franchise within the state, these states are:
- North Carolina
- South Carolina
- South Dakota
THE STEPS INVOLVED IN REGISTERING YOUR FDD OR FILING YOUR FDD AT THE STATE LEVEL, INCLUDE:
STEP 1. Identify the State(s) Involved in the Franchise Sale – First, determine the state(s) that are involved in your franchise sale.
Factors that you should evaluate with your legal counsel include:
(a) the state where the franchised business will be established;
(b) the franchisee’s state of residence,
(c) any state where franchise sales activities/negotiations occurred, and
(d) the state from which your franchise company operates.
STEP 2. Determine each States Franchise Registration and Filing Status – Determine the FDD registration and filing status of the state(s) involved in your franchise sale.
STEP 3. Register / File your FDD – You must include with your application:
(a) Copy of your FDD
(b) Payment for the state’s registration fee.
Once the application is received it will be reviewed by a state regulator.
Below is a summary of the franchise registration states, the franchise filing states, the state regulators involved, how long FDD registration takes, and the application process.
FRANCHISE REGISTRATION STATES
- Hawaii: your FDD must be registered with the Business Registration Division of the Department of Commerce and Consumer Affairs;
- Washington: your FDD must be registered with the Securities Division of the Washington State Department of Financial Institutions; and
- Wisconsin: your FDD must be registered with the Securities Division of the Wisconsin Department of Financial Institutions.
If your primary trademarks are not registered with the United States Patent and Trademark Office (the “USPTO”) then you must also register your FDD in:
- Connecticut: your FDD must be registered with the Connecticut Department of Banking;
- North Carolina: your FDD must be registered with the North Carolina Secretary of State;
FRANCHISE FILING STATES
For franchisors that have a federally registered trademark: the franchise filing states are:
- Florida: an annual franchise exemption must be filed with the Florida Department of Agriculture and Consumer Services;
- South Dakota: an annual notice must be filed with the South Dakota Dept. of Labor & Regulation;
- Utah: an annual notice must be filed with the Utah Division of Consumer protection;
- Connecticut: a one-time exemption notice must be filed with the Connecticut Department of Banking;
- Kentucky: a one-time exemption notice must be filed with the Office of the Kentucky Attorney General;
- Nebraska: a one-time exemption notice must be filed with the Nebraska Department of Banking and Finance;
- North Carolina: a one-time exemption notice must be filed with the North Carolina Secretary of State;
- South Carolina: a one-time exemption notice should be filed with the South Carolina Secretary of State;
- Texas: a one-time exemption notice must be filed with the Texas Secretary of State.
The additional Filing States if you do not have a federally registered trademark:
HOW LONG DOES FDD REGISTRATION TAKE?
Timing varies from state to state and FDD registration can take anywhere from 20 days to three months depending on the completeness of your FDD and the time of year it is filed.
UNIFORM FRANCHISE REGISTRATION APPLICATION
There is variation among the states regarding certain disclosure requirements and supplements to the NASAA forms. Generally, your franchise registration application will include the following forms:
- Uniform Franchise Registration Application page with data on the franchisor;
- Certification page or “signature page”;
- Consent to Service of Process;
- Sales Agent Disclosure Form and the new Franchise Seller Disclosure Form;
- Supplemental Information Form; - Copies of all advertising or promotional literature proposed to be used in the state;
- Two paper copies of the disclosure document;
- An auditors’ consent; and
- Application fee.