What is an FDD and Why Do I Need One?
What It Is
“FDD” is the commonly used acronym for “Franchise Disclosure Document.” The purpose of an FDD is to provide important information to people who are interested in purchasing franchises.
FDDs include 23 items about the financial health, management, and litigation history of a franchisor (the company selling the franchise), as well as the fees, supplier requirements, and financing opportunities associated with the franchise system. The FDD will also include as exhibits copies of all legal contracts a franchisee (the person buying the franchise) will need to sign when buying a franchise, including the franchise agreement and any personal guarantee or non-compete agreement.
Why You Need One
The Federal Trade Commission (“FTC”) requires that franchisors provide each prospective franchisee with a current FDD at least 14 days before the prospect purchases a franchise or gives the franchisor any money. If you sell a franchise without providing the franchisee with an FDD or complying with the FTC’s required waiting period, you could be held civilly and criminally liable. Additionally, you could violate state franchise laws and regulations, which carry additional civil and criminal penalties. It is important that you contact experienced franchise counsel to help you draft an FDD if you intend to franchise your business or think you may already be franchising your business (see our article about inadvertent franchising here).