What Are Franchise Disclosure Documents And Why Does Your Franchise Need One
Owning and operating a franchise comes with several responsibilities. There are a lot of aspects to handle and tackle. Hence, following due process and completing all legalities duly is a basic requirement. Owning a franchise demands significant investments, so every step should be intentional and cautious to avoid litigation or losses. To ease the process, legal documents are involved. Hence, preparing and handling these documents properly becomes essential here. FDDs or franchise disclosure documents provide all necessary franchisor and brand information. Let’s learn about FDDs in-depth and understand why every franchise needs one.
What are franchise disclosure documents?
Franchisors present this document to their prospective franchisees 2 weeks before purchase completion. There are 23 precise components of a franchise disclosure document. The details regarding fees, legal details, and company and team specifics are shared in this document. This document’s purpose is to allow the franchisee to know more about the brand they’re dealing with and the tidbits of its operational procedures.
This gives franchisees a chance to grasp the vision and objectives of the company and ensures that there’s no place for confusion. A franchisee will know what they’re signing up for before finalising the deal. This will ensure systematic progress and leave no scope for arguments in the future.
If you’re a beginner, read the entire document thoroughly before signing the receipt page. However, it’s essential to know that signing franchise disclosure documents don’t establish the surety of buying the franchise. It’s more of an advancement than a confirmation of a franchise deal.
Read More: Franchise Agreement
What do franchise disclosure documents contain?
The disclosure documents contain several points of essential information. Here’s a list of all the things it contains.
This section includes the history of the company, its vision, future goals, etc. Companies can disclose information on their associations with affiliates or parental branches.
Knowing the company isn’t enough. It’s also important to know those in charge of important decisions, like the founders, officers for different regions, etc.
Companies occasionally have to deal with litigations. The franchisor should include a list of those and their current status in the documents.
This informs if and when the company declares bankruptcy.
Initial franchise fees description
This is the initial investment a franchisee makes in the franchise deal.
Fees other than initial fees
Mention royalties or other payments here.
Initial investment’s estimated costs
The initial costs borne by the franchisee are usually split across several categories. Estimating the costs for each gives an idea of the total cost of starting.
Restrictions on products and services
Sometimes, there are restrictions with certain products or services that the franchisor discloses.
This part is essential because it helps set realistic expectations and clear any confusion regarding what’s expected of the franchisee.
Financing arrangement details
Sometimes, the franchisor provides financing and can mention the details under this category.
This section has information on the franchise location.
Disclosure of existing trademarks
Franchisors can disclose the existing trademarks under this section.
Intellectual property other than trademarks
The franchisor should fully disclose patents, copyrights, and other pieces of intellectual property.
These govern the day-to-day operations of the franchise.
Often franchisors restrict the selling of competitor brands’ products in their stores.
Terms of renewal, transfer, termination etc.
This is for keeping a record of important dates or laying down well-defined procedures.
Disclosure of public figures
The company reveals the celebrities or other public figures associated with the brand here.
Unit financial performance
This field is optional but can be filled in for more information on unit performance.
Other important details that must be present include
- Outlet count and locations
- Full financial statements
- Contracts, including a sample of the franchise agreement
- Receipts for confirmation of receiving the document
Updation of the FDDs
Franchisors need to update the franchise disclosure documents every 120 days. That’s because many details mentioned in the above list may change with time due to expansion, de-scaling or other factors. Hence, updation prevents misleading the franchisee and always presents the brand accurately. To avoid delays in deals, the franchisor must ensure that the renewal request is submitted in time.
Franchisee-franchisor trust depends greatly on authenticity and adopting an upfront approach. These documents exemplify that and must be presented and received with care. Also, timely updation ensures that legal troubles are at bay and puts forth realistic expectations on both sides. During the two-week phase, properly examine the franchise disclosure documents. Any legal roadblocks should be taken seriously and resolved through fruitful consultations with legal experts.
For franchisees, settling should never be an option. Never sign the documents until you’re through with the demands and until you gain all the relevant information you want. If any contract clauses demand more clarity, the franchisor should consider them. Individuals must ensure that the franchise they’re investing in is a good option for their future. So, they deserve every right to demand clarification or further detailing on certain statements.
Getting a franchise is an exciting path to embark upon. However, It takes a lot of effort and wit to maintain a profitable franchise. For franchisors, managing staff, multiple outlets and deciding the branding patterns for their brand becomes a lot to handle. The franchise disclosure documents are one of the more critical aspects of franchising. Hence, both parties should treat this as a serious task and be honest about their thoughts.
Resolve disagreements or concerns through discussion and negotiation before finalising anything. Apart from that, these documents are a crucial step in the deal and can help establish a healthy dynamic between the franchisor and the franchisee.