A Franchise Disclosure Document, also known as an FDD, is a legal document that a franchisor must disclose to a prospective franchisee before a franchise may be sold. The FDD contains 23 disclosure sections that, under the franchise laws, require a franchisor to disclose information about the franchisor, the franchise opportunity being sold, fees charged by the franchisor, the legal relationship between the franchisor and franchisee, and other information about the franchise offering.
Below we discuss the FDD in more detail including, what must be included in an FDD, when an FDD must be disclosed to prospective franchisees, and when an FDD must be updated and registered.
Under the federal and state franchise laws an FDD must include 23 sections with each section referred to as an “Item.” Below is a summary of the 23 disclosure items of an FDD:
Within those states known as the franchise registration states, the FDD must be filed and registered with a state franchise examiner.
Under the Federal Franchise Rule, the FDD must be disclosed to a prospective franchisee not less than 14 days prior to the prospective franchisee signing a franchise agreement or paying any money to the franchisor. Disclosure of the FDD by itself is not enough; commencement of the 14-day period is governed based on the day that the franchisee signs the FDD receipt page contained in Item 23 of the FDD. Certain states have modified this 14-day period. Learn more about the FDD disclosure period.
The the issuance date of a FDD is the date that the franchisor designates its FDD as being complete and in compliance with federal franchise laws. Compliance and the determination of the issuance date is a self-certifying process in that there is no federal agency that reviews or registers FDDs. At the state level, within the franchise registration states, the FDD must be registered with a state examiner who will, after a review process, grant or deny registration.
The FDD must be issued and updated no less frequently than annually, within 120 days of the franchisor’s fiscal year end. However, if there are material changes in the information contained in the FDD, then the FDD must be updated on a quarterly basis or immediately for material or misleading information. Learn more about when the FDD needs to be updated.
Yes. Within the franchise registration states, FDD registration must be renewed on an annual basis within 120 days of the franchisor’s fiscal year end. Since state examiners will need time to review a franchisor’s registration renewal application, it is important for franchisors to submit their renewal applications well before the 120-day renewal deadline – otherwise a franchisor risks “going dark” in that state, whereby their initial registration expires before renewal is granted.
Every year, the FDD needs to be updated and FDD registrations must be renewed. To learn more about the franchise registration states and state-specific requirements for registering and filing an FDD, visit our interactive franchise registration map.
When dealing with the franchise registration states, if (a) the prospective franchisee resides in a franchise registration state, (b) the franchised business will be developed and located within a franchise registration state, or (c) the franchisor is marketing/offering the sale of franchises in a franchise registration state, then the FDD must be registered in that state. Also, New York franchisors (i.e., franchisors incorporated in New York or who operate from New York) must register their FDDs in New York (in addition to the other states) whether or not the franchisee or franchised business is located in New York.
Yes. As a part of FDD Item 21, the FDD must contain audited financial statements of the franchisor. However, in most states, for new franchisors that have not previously offered or sold franchises, there is a partial financial statement phase-in exemption wherein a start-up franchisor may initially issue its FDD with an unaudited opening balance sheet. However, many registration states do not recognize this phase-in process. Learn more about the financial statements that have to be included in the FDD.
If during the franchise sales and negotiating process a franchisor makes changes to the franchise agreement, if those changes were negotiated changes requested by the franchisee and for the benefit of the franchisee, then the franchisor does not need to amend its FDD. Franchisors should be cautious as to negotiated changes to the franchise agreement, as FDDs most likely contain a representation that a franchise offering is “uniform” as to what the franchisor offers and grants to franchisees.
Yes, because the FDD is an integral part of the franchise sales process and is provided to prospective franchisees at the beginning of the franchise sales process, the FDD is also a business document that discloses to prospective franchisees the business underpinnings of your franchise.
When evaluating and comparing franchise systems, prospective franchisees and franchise brokers will compare and evaluate your FDD from a business perspective as to how well your franchise offering stacks up against your competitors. Consider some of the following business points:
To learn more about the FDD and franchising, read our Ultimate Guide to Franchising and visit the Learn Franchising section of our website to access our FREE webinars and guides about franchising and growing your franchise.
To Learn More About how we can help Franchise Your Business, Register your FDD, and Grow your Franchise, contact us at (718) 979-8688 or fill out our contact form.
Download PDF – Everything You Need to Know About the FDD.
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