FDD Disclosure requirements Items 1-23 Listed Below
Einbinder & Dunn attorneys assist both entrepreneur and established franchisors in preparing franchise disclosure documents (FDDs) that comply with all applicable federal and state requirements. Because the requirements for preparing an FDD are complex and evolving, the process of drafting these documents requires the attention of a firm with dynamic expertise. The firm's attorneys also revise franchisor agreements to ensure to the maximum extent possible that the agreements insulate the franchisor from problems that often arise during the franchisor-franchisee relationship.
The firm also renews and analyzes FDDs for prospective franchisees. Prospective franchisees require experienced legal counsel to analyze and interpret these documents as well.
The Federal Trade Commission (FTC) requires franchisors to prepare and provide services for franchisees with an FDD, within a specified period of time, before completing the sale of a franchise. Thirteen states require disclosure as well as registration of an FDD. In total, 23 items of information must be disclosed to prospective franchisees in this document. The FDD also includes a comprehensive set of agreements that serve to govern franchisor-franchisee relationships.
A brief description of each required disclosure item in an FDD is provided below.
- Item 1 – Background information on the franchisor, its parents, predecessors and affiliates.
- Item 2 – Business experience for the last five years of certain individuals, including directors and principal officers of the franchisor.
- Item 3 – Certain lawsuits involving the franchisor, its parents, predecessors and affiliates and certain lawsuits involving any individual disclosed in Item 2.
- Item 4 – Bankruptcy history of the franchisor, its parent, predecessors, affiliates and any officer or partner of the franchisor.
- Item 5 – Fees and payments or commitments to pay for services or goods received from the franchisor before the franchisee's business opens, including the initial franchise fee.
- Item 6 – Recurring or occasional fees associated with operating the franchised business.
- Item 7 – The franchisee's entire estimated initial investment to begin operating the franchised business, including rent, inventory and equipment.
- Item 8 – Restrictions on the sources for goods and services that the franchisee must use and the amount of revenue that the franchisor may receive from required suppliers.
- Item 9 – The franchisee's principal obligations with references to sections in the franchise agreement or other agreements where the franchisee can ascertain more information relating to that obligation.
- Item 10 – All material terms and conditions of any financing arrangements offered by the franchisor, including the identity of any lender, the amount of any financing offered, the applicable interest rate and other common financing terms.
- Item 11 – The franchisor's obligations to furnish pre-opening and post-opening assistance to franchisees, including but not limited to: locating and acquiring a site for the franchisee's franchised business; constructing or remodeling that location; training the franchisee; hiring and training the franchisee's employees; securing necessary equipment, signs, fixtures, inventory and supplies; providing administrative, accounting and inventory control procedures; and developing an advertising program or fund for the franchisee and/or the franchise system.
- Item 12 – Territory granted to a franchisee for its franchised business, an explanation of whether or not that territory is exclusive and an outline of the franchisor's and the franchisee's respective rights and restrictions in connection with doing business within the franchisee's territory.
- Item 13 – The franchisor's trademarks, any pending action or restriction concerning the franchisor's trademarks and the respective obligations of the franchisor and/or the franchisee to protect the franchisor's trademarks.
- Item 14 – The franchisor's patents and copyrights, any pending action or restriction concerning the franchisor's patents and copyrights, and the respective obligations of the franchisor and/or the franchisee to protect the franchisor's patents and copyrights.
- Item 15 – Whether or not the franchisee is required to participate in the day-to-day operations of the franchised business.
- Item 16 – Any restrictions relating to the goods and services that the franchisee may sell.
- Item 17 – Common provisions of the franchise agreement relating to the franchisor-franchisee relationship, including the term, renewal, transfer and termination of the franchise agreement.
- Item 18 – Certain information concerning the involvement of a public figure with the franchise system.
- Item 19 – Optional representations concerning the historic or projected financial performance of the franchisor, its affiliates, its franchisees, its company-owned units, or some combination of the above.
- Item 20 – The number of franchised units and company-owned units in existence for the last three years.
- Item 21 – The franchisor's financial statements: its balance sheet, income statement and cash flow statement. While there are exceptions in some instances, franchisors are required to provide audited financial statements.
- Item 22 – All of the proposed agreements relating to the sale of a franchise, including the franchise agreement, confidentiality agreements and all other applicable agreements.
- Item 23 – A receipt for the disclosure document furnished to each franchisee which must be signed by the franchisee and returned to the franchisor. Receipts must be kept by the franchisor for at least three years.
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