Franchise Law 101: The Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is a legal document that is used in the process of selling and purchasing franchises. Essentially, it’s a document that franchisors present to potential buyers during the franchise selling process. While federal regulations require an FDD to be given to every potential buyer of a franchise in the country, in Virginia and the other 15 registration states, the FDD must be registered with the state prior to any direct sales activities taking place. This means that the State Corporation Commission will review the franchise agreement and the FDD to ensure that it complies with state law before any potential franchisee reads it.  So, if you are in the process of buying or selling a franchise, the FDD is an important document to know about. Below we discuss some of the basics of franchise law, and in particular the FDD.

What does the FDD cover?

Essentially, a franchise’s FDD covers information about the franchisor and the system, information about the franchise agreement and the requirements placed on franchisees in the system and information regarding franchisees who are now or who have been in the system in the past and why they are no longer in the system.  Additionally, the FDD contains financial information on the franchisor and information about franchise regulators. In over 20 years of reviewing FDDs and its predecessor, the UFOC, I have found incredible inconsistencies between what the FDD said and what the franchise agreement actually said. A thorough review of the FDD is absolutely necessary prior to making the decision to buy a franchise.   

While the FDD provides great information, I often counsel potential franchise buyers to make a list of 10 or 12 items that they have questions about or need more information about.  Then take the list of franchisees and ex-franchisees and contact about 10 of them dispersed across the country both near and far from the franchisor and in cities and rural areas. Conduct interviews with those franchisees asking about the 10 or 12 items you identified and record the answers you get.  Then compare the answers against whether the franchisee was near or far from the franchisor, in a city or a more rural setting. That process may give you great insight into how well the franchise system is run. These factors will give you a much greater insight into whether you want to invest your money than the promises a franchise sales person gives you.    

In addition to disclosure requirements, there are, of course, other formalities that must be abided by in the franchise sales process. For instance, before you offer or sell a franchise, the FDD must be in the hands of the potential franchisee for 14 calendar days before the franchisor receives any money or the franchisee signs any agreements. Franchisors also have to make sure that the FDD is completely valid and correct and that contains the latest annual financial information. Through the course of a year, the franchisor may make amendments or changes to the FDD if information about the franchise changes, and if the FDD is registered already with the state, the changes must be reviewed and accepted by the state before giving it out to prospective buyers. Although this list is by no means inclusive of everything required in FDDs, you can see how important they are and the many purposes that they serve.

Speak with an experienced attorney.

At the Wilson Law Group, it’s our goal to help make sure that your new business venture is a success, whether it’s a new franchise or not. We regularly help clients develop their businesses and work with them every step of the way. If you are in the process of buying or selling a franchise, Jim Wilson is an experienced Virginia attorney who can help you make the right choices and to get the best deal. Contact us at (804) 864-5268 to speak with an attorney today.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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