Getting acquainted with a franchise disclosure document

The franchise disclosure document and agreement are very important and complex legal documents which spell out the terms and guidelines between you as franchisor and your franchisee.

This document must be prepared by an experienced solicitor since it serves as the “Bible” of your franchise. It covers each and every aspect of your business, and guides you in operating your franchise.

New guidelines for franchises have been framed by the Federal Trade Commission. ‘Uniform Franchise Offering Circular’, or UFOC, the earlier name of guidelines, has been changed to the ‘Franchise Disclosure Document’, or FDD. The Commission also incorporated new requirements in the content of FDDs. Non-conformance to the new guidelines will attract penalties, fees and lawsuits.

Major changes in new FDD with respect to UFOC are explained below.

  1. FDD encourages disclosure of earnings. Details regarding business costs can be disclosed freely. Financial results of a subset of franchisees can be furnished without comparing them to entire chain of franchises.

  2. FDD makes it mandatory for franchisors to disclose contact details of all franchisees in their system, including those approved by franchisors as independent associations. In the past, as per UFOC guidelines, prospects had themselves to find independent associations.

  3. FDD and other related documents can now be sent electronically. This change will save money and enable them to send information quickly to their prospects.

  4. Franchisors are now required to list all the suits of previous year filed by them against franchisees.

FDD will provide more transparency. If all the documents comply with legal requirements, you will have no risk in running your franchise successfully.