Learn what an FDD is, how long you have to review it, if you need to register an FDD in your state, and your legal obligations as a franchisee.
FDD Definition and Purpose
As you research investing in a proven business model by becoming a franchisee, you might wonder: what is an FDD? A Franchise Disclosure Document (FDD) is a required legal document the franchisor curates and distributes to potential franchisees. The document provides information about the brand’s franchise opportunity. It assists you in making informed decisions about becoming a franchisee. It’s a guide through the franchise system so you can understand the business model, the franchisor’s track record, the legal obligations of a franchise, and your rights as a franchisee.
The primary purpose of an FDD is to protect potential franchisees by ensuring access to details about the franchisor and the franchise opportunity. It helps prevent fraud and misrepresentation, and ensures the information provided by the franchisor is accurate. You’ll be equipped to assess risks, rewards, and whether the opportunity aligns with your goals, capabilities, and expectations.
The Main Sections of an FDD
The FDD is divided into several sections, or items, the structure of which may vary depending on the franchisor. The six main items to take note of according to the International Franchise Association (IFA) are:
- Section 7: Estimated initial investment: This section provides an overview of the total estimated investment required to open and operate the franchise. It includes the initial fees, real estate costs, inventory, equipment, and everything else required to get the business running.
- Section 11: Franchisor’s assistance, advertising, computer systems, and training: This section specifies the support and training the franchisor will offer you, as well as the advertising and marketing assistance available.
- Section 17: Renewal, termination, transfer, and dispute resolution: This section outlines the terms for renewing the franchise agreement, the conditions under which the agreement can be terminated, and the process for transferring the franchise to someone else. It may also include information about dispute resolution procedures and non-compete clauses.
- Section 19: Financial performance representations: This section, if provided by the franchisor, discloses the financial performance of all locations open during the previous fiscal year. If item 19 isn’t provided, be sure to talk to existing franchisees about their sales and earnings.
- Section 21: Financial statements: This section includes the last three years of the franchisor’s audited financial statements, providing valuable information about its financial health. Take note of the balance sheet and income statement.
- Section 22: Contracts: Make sure to read and understand all agreements before signing. You may even want to consider having a franchise lawyer review the documents as well.
Receive and Review the FDD
While the FDD is not a legally binding contract, it serves as a disclosure document providing you with essential information about the franchise opportunity. The franchise agreement, however, is a legally binding document, which you’ll sign if you decide to proceed with the franchise. The FDD is a tool for potential franchisees offering transparency and information about the franchise brand.
According to Franchising.com, franchisors must provide the FDD to potential franchisees at least 14 calendar days before the signing of any agreements or any payment is made. You can also request the FDD sooner in the process. Read each section of the FDD and seek clarification from the franchisor if you have questions. You’ll have sufficient time to review the document, conduct due diligence, and seek professional advice.
A qualified franchise attorney can help you navigate the legal jargon and can also determine if the FDD needs to be registered in your state since requirements vary.
The Beans & Brews Franchise Opportunity
Investing in Beans & Brews Coffeehouse means you’re a part of a rapidly expanding business and can be the first to bring our High-Altitude Roasting™ to a new market. We offer two coffee shop franchise models: a standard model with a lobby and drive-thru, and an express model.
Our steps to franchise ownership include an FDD Review. Our FDD provides you with information about us, our franchise system, our respective roles, and general agreements that will need to be signed. Learn more about your potential franchise investment with this breakdown of estimated coffeehouse franchise costs. Get started today!
