Learn the difference between two of the most important legal documents in the franchise sales process.
Whether you’re a franchisor offering franchises for sale or a franchisee looking to purchase a franchise opportunity, the Franchise Disclosure Document (FDD) and the Franchise Agreement are two of the most important legal documents in the franchise sales process.
From disclosing important corporate information to defining the legal relationships between parties, each document serves a purpose for both the franchisor and franchisee. Because of that, it’s important for everyone involved in the sale and purchase of a franchise to understand the difference between the two documents and the role each one plays in franchising.
Below and in this video, we’ll look at each document and discuss their significance in the franchise industry.
The Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is a legally mandated pre-sales disclosure document. Containing 23 specific disclosure items related to the franchise, the purpose of the FDD is to inform prospective franchise buyers about the franchise opportunity they’re considering investing in before making the purchase.
Under the Federal Trade Commission (FTC) Franchise Rule, franchisors are legally required to disclose the FDD to a prospective franchisee no later than 14 days prior to signing a franchise agreement or accepting fees related to the sale of a franchise. The purpose of this disclosure period is to allow prospective franchisees time to review the FDD with a qualified franchise attorney before investing.
The contents of the FDD are designed to educate prospective franchisees about the franchise, including but not limited to financial performance data, ownership and affiliation information, fees, territories and more. The disclosure items contained within the FDD also include a summary breakdown of the franchisors’ legal obligations and relationship to the franchise buyer. These obligations include the level of support the franchisee will receive from the franchisor, terms and conditions, and more.
Within the FDD, franchisees should also expect to find copies of contracts they will be required to sign at the time of purchasing a franchise, including a sample of the franchisor’s standard franchise agreement.
The Franchise Agreement
The Franchise Agreement is a legal agreement that defines the relationship between a franchisor and a franchisee. It is signed by both parties at the time of the sale of a franchise.
Within the franchise agreement, the franchisor awards to the franchisee the license and right to utilize the franchisors’ trademarks, business systems, operations manuals, suppliers, sell the franchisor’s products and services, and more. The agreement also defines the franchisee’s designated territory for operations and describes the ongoing obligations of a franchisee including royalties, minimum financial commitments for marketing efforts, following the franchisor’s standards, among other obligations.
In addition to establishing the franchisee’s obligations, the franchise agreement also establishes the obligations of the franchisor to the franchisee in terms of ongoing support, training, and more.
In summary, the FDD is a pre-sales disclosure document designed to educate and inform the franchisee about the opportunity being offered before making a purchase. In contrast, the Franchise Agreement is a legal agreement between the franchisor and franchisee that is signed by both parties at the time of the sale of a franchise.
While both documents are connected in the franchising process, each serves a different, though equally important, purpose.If you’re considering franchising or are ready to take the next step in the franchising process, we can help. Contact us to learn more about franchising and the ways we can support you in your franchising journey.