Starting in July 2008, franchisors will be distributing a new Franchise Disclosure Document (FDD) as mandated by the Federal Trade Commission. Previously, the franchisors had to issue a Uniform Franchise Offer Circular (UFOC). But it’s not just a catchier name on the same document. There are a number of significant changes in the FDD.
What is the FDD?
The FDD builds on some of the same principles of the UFOC and shares the same core function: to provide potential franchisees with accurate information about the franchise offer. The UFOC had to be personally delivered to the potential franchisee. The FDD makes use of modern technology, allowing for delivery options that include via the Internet or on a CD-ROM. This saves time for a franchisee who is exploring a franchise that isn’t currently in their state. Franchisors, though, have to make sure that there are no pop-up windows or advertisements on the Internet site.
New Rules on Earning Claims
The franchisor gets a break when it comes to earning claims. In the past, these earning claims had to be on the basis of actual earnings of a franchise location and all these locations that achieved the level had to be listed. With the FDD, franchisors can offer an earnings claim of a sub-group of franchise locations. For instance, the sub-group could be “franchises that have been in business for more than two years.” The franchisor lists only those franchisees from the same sub-group that have reached the given earning level. But, the franchisor has to tell the potential franchisee exactly what group was chosen, and why. This section is now called the Financial Performance Representations.
Information on Top Employees Included
The franchisor is required to disclose certain information about its key employees, too, including the litigation and bankruptcy histories of the franchise company, parent company and any affiliates that have a stake in the company. The franchisor also has to give a warning, if it is not providing any protected territory.
The Franchise Disclosure Document is crucial for you to understand before you sign the franchise agreement. Go through it thoroughly and, no matter how well you think you understand it, consult a franchise attorney as well.
The FDD is just one of a load of paperwork that you'll find as you enter the franchise process. But it's a crucial element. Another crucial element is the franchise agreement, which spells out your exact relationship with the franchisor. We'll explore that more fully in another article. However, both of these documents are extremely important to your success as a franchisee. It's crucial that you understand what they say.
