One big advantage that occurs within the potential franchisee’s due diligence timeframe is that the franchisor is required by law to provide what is called a Franchise Disclosure Document (FDD) during the pre-sales disclosure process. (Note: This used to be called a Uniform Franchise Offering Circular.)
This document is required to be submitted to potential franchisees by the Federal Trade Commission (FTC) Franchise Rule. This rule gets into the specifics of FDD disclosure obligations including when (at least 14 days prior to any contract signing) the franchisor has to provide the document.
The FDD contains the following valuable information:
- Franchisor information like how long they have been in business and likely competition
- Key person business experience
- Any litigation history that has occurred with the franchisor
- Any information on if the franchisor ever filed for bankruptcy
- The franchise fee and other fees and expenses the franchisee will have to pay such as advertising costs, monthly royalties and training expenses
- The training and assistance program used by the franchisor
- Your estimated initial investment and obligations to the business
- Financing arrangements
- Franchisor obligations
- Territory, trademarks, patents, copyrights and other proprietary information
- Restrictions on any goods or services you can offer
- Renewal, termination, repurchase, modification, transfer of the franchise and the dispute resolution process
- Financial information about the franchisor including financial statements
- A list of franchise outlets
This is not a comprehensive list but it provides the majority of what you will receive with the FDD. The FTC site at http://www.ftc.gov/bcp/franchise/faq1.shtm provides more information on the disclosure obligations of the franchisor.
