Fundamentals of a Franchise Disclosure Document (FDD)
Many successful businesses begin through franchising. The first thing you will receive when you are considering the purchase of a franchise is a franchise disclosure document. The franchise disclosure document includes critical information about the franchise, including financial statements and other important records pertaining to bookkeeping.
What is a Franchise Disclosure Document?
A franchise disclosure document is a legal document that franchisors are required to provide to prospective franchisees as part of the due diligence process pre-sale. The document contains essential information for individuals who are interested in buying a franchise.
The franchise disclosure document will provide critical information about the franchisor, the franchise system, and the franchise agreement, including how the business relationship between the potential franchisee and the franchisor will be conducted.
It outlines information regarding both parties’ roles in the franchise. The goal is to allow the prospective franchisee to make an informed decision about whether or not they want to invest in the business. For example, it may be included in the franchise disclosure document that the franchisor may help the franchisee find a location and training at the start, but continue to support them through continuous advice, workshops, or newsletters. However, the franchisor can also not provide any help to the franchisee after the initial start-up. Franchisors take many different approaches to what relationships they have with their franchisees, which is why it is mandatory for the relationship and roles of each party to be laid out in the franchise disclosure document.
Requirements of a Franchise Disclosure Document
The franchise disclosure document includes 23 sections. The prospective franchisee must review each of them prior to signing. It is necessary that the franchise provides the disclosure document to the franchisee at least 14 days before it must be signed or prior to any initial money exchange.
The 23 sections included in the franchise disclosure document are:
1. The franchisor and any parents, predecessors, and affiliates
2. Business experience
5. Initial fees
6. Other fees
7. Estimated initial investment
8. Restrictions on sources of products and services
9. Franchisee’s obligations
11. Franchisor’s assistance, advertising, computer systems, and training
14. Patents, copyrights, and proprietary information
15. Obligation to participate in the actual operation of the franchise business
16. Restrictions on what the franchisee may sell
17. Renewal, termination, transfer, and dispute resolution
18. Public figures
19. Financial performance representations
20. Outlets and franchisee information
21. Financial statements
Each section highlights information that is essential for the potential franchisee to know before buying a franchise. If you are currently in the process of purchasing a franchise and want to get a head start on your bookkeeping set up, contact our experienced bookkeepers at BrightBooks!
BrightBooks is here to help. Contact us for bookkeeping assistance.