What Is The Difference Between The Franchise Disclosure Document And The Franchise Agreement

On Behalf of Lanard and Associates | Aug 4, 2016 | Firm News

In simple terms, the Franchise Disclosure Document (FDD) is a comprehensive document that provides details on the franchise opportunity, allowing franchisees to evaluate the investment potential. The Franchise Agreement (FA) is the contract that provides the specific terms for the franchisor-franchisee relationship.

Think of the Franchise Disclosure Document as a pre-sale disclosure document or sales brochure, while the Franchise Agreement is the actual contract.

There’s much more to FDDs and FAs, and the franchise lawyers at Luther Lanard are here to offer a quick rundown of how these work and why they are so important. If you’re a franchisee and need a lawyer to review your Franchise Disclosure Document or Franchise Agreement, contact our law offices today. Our franchise attorneys operate out of Florida, California, Texas, and Pennsylvania.

Understanding the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document is a large document comprised of several federally mandated components, which includes the Franchise Agreement.

The Franchise Disclosure Document is required to have:

• 23 disclosure items
• All contracts that the franchisee will be required to sign
• Financial statements of the franchisor (usually audited)
• The table of contents of the Operations Manual
• A listing of the training topics you will receive and the hours for each topic
• A list of all franchisees in the system and any franchisees who have left the system
• Any state required disclosures

The Items of the Franchise Disclosure Document (FDD)

The items of the Franchise Disclosure Document are the disclosures that the Federal Trade Commission has mandated be provided to any prospective franchisee.

• Item 1 consists of a disclosure of the background of the franchise and the franchisor company, its parents and affiliated companies, along with information about competition and regulations in the franchise’s industry
• Item 2 describes the background of the people involved in the franchise
• Items 3 and 4 are the required disclosure of past litigation and bankruptcy
• Items 5 through 7 are the financial disclosures (fees payable to the franchisor and expenses that a new franchisee can expect to open the business and operate it, typically in the first few months)

The remaining items in an FDD include the definition of the territory, franchisee obligations to the franchisor, all trademarks and patents of the franchisor, and other pertinent information.

If you would like a more detailed description of each item in a Franchise Disclosure Document, feel free to reach out to Luther Lanard, PC for more information.

Common Questions Clients Have About the Franchise Disclosure Document (FDD)

Below are some common questions that past clients have asked our franchise lawyers about Franchise Disclosure Documents.

Do Franchisees Have to Sign the Franchise Disclosure Document?

No. Since an FDD is more of a brochure or document rather than a contract, it does not need to be signed. It should be carefully reviewed, however, with the same attention one would give an actual contract.

Can I Negotiate the Terms of the Franchise Disclosure Document?

No. There may be some terms that can be negotiated in the included Franchise Agreement, but the FDD itself and the contents within the FDD per se are not up for negotiation.

What Are Potential Red Flags in a Franchise Disclosure Document?

Some common red flags to note in FDD items include:

• A history of lawsuits or bankruptcies
• Any claims of fraud or misrepresentation
• Underestimated startup costs
• Lack of information on financial performance
• High turnover rate for franchisees (e.g., lack of renewals, more closures than openings)
• No exclusivity or protected territory

The franchise lawyers here at Luther Lanard, PC can help you identify all kinds of FDD red flags. Our team will explain what they could mean for you as a potential franchisee.

What If a Franchisor Does Not Provide a Franchise Disclosure Document?

If a franchisor doesn’t provide you with an FDD at least 14 days before you sign a Franchise Agreement or make a payment, this is a violation of state and federal laws. The FDD is your opportunity to evaluate your investment, and you are legally required to receive one.

Understanding the Franchise Agreement (FA)

The franchise agreement is your actual contract with the franchisor. This is the document that will define your relationship with the franchisor. It contains the terms with which you must comply for the duration of the agreement.

What Is in a Financial Agreement (FA)?

A franchise agreement will contain terms such as:

• The franchise fee you will pay
• The royalty payments you must make and the frequency
• Any advertising fund expenditures you must make (including national, regional, and local)
• Your territory
• Restrictions on the purchase of products and services
• Your obligations to the franchisor as a franchisee
• Your franchisor’s promises to you
• Your rights to transfer the franchise agreement
• Your rights to renew the franchise agreement
• All other aspects of the contractual relationship between you and the franchisor

Common Questions Clients Have About Franchise Agreements

Below are some common questions that past clients have asked our franchise lawyers about Franchise Agreements.

When Do Franchisees Sign the Franchise Agreement?

Franchisees sign the Franchise Agreement no sooner than 14 days after receiving a Franchise Disclosure Document.

Can I Negotiate the Terms of the Franchise Agreement?

It depends on the franchisor and the specific terms that you wish to negotiate. Regardless of whether the terms of the contract are negotiable, it is still very important to have an attorney review both the FDD and the FA as the last step in validating the franchise opportunity.

How Long Does a Typical Franchise Agreement Last?

The typical franchise agreement can last anywhere from 5 years to 20 years.

Can a Franchisor Terminate the Franchise Agreement?

Yes, a franchisor can choose to terminate an FA if the franchisee fails to pay royalties or fees, operates outside of the set standards of the system, abandons the business, or engages in the unauthorized use of trademarks.

Have More Questions About FDDs and FAs? Contact Our Lawyers Today

Both FDDs and FAs can be complicated, especially for those just starting their journey as franchisees. It’s a good idea to hire an experienced franchise lawyer to help you avoid costly mistakes and other setbacks. That’s where we can help.

The lawyers at Luther Lanard, PC have more than 50 years of combined experience in franchise law, and a strong knowledge of markets in Florida, California, Texas, and Pennsylvania. If you have any additional questions about Franchise Disclosure Documents or Franchise Agreements, contact our law firm today.