If you’re looking at franchises, you’ll hear “FDD” a lot. So what is an FDD? It’s the Franchise Disclosure Document, and it’s the single most useful thing a franchisor will hand you. It’s also long, dense, and easy to skim. Don’t skim it.
What Is an FDD and Why Does It Exist?
The FTC Franchise Rule, 16 CFR Part 436, requires franchisors to give buyers a disclosure document before the sale. You must get it at least 14 calendar days before you sign a binding agreement or pay any money. The FTC also says you can ask for it once the franchisor has received your application and agreed to consider it.
The rule sets out 23 required Items, in a set order. That’s helpful. Once you learn the layout, you can compare brands side by side.
The Items I Read First
You should read all 23. But if you want to know where the important stuff lives, start here.
Items 1 to 4: Who You’re Dealing With
Item 1 covers the franchisor and its parents and affiliates. Item 2 lists the executives’ business experience. Item 3 is litigation, and Item 4 is bankruptcy. A long Item 3 isn’t always a deal breaker, but you want it explained.
Items 5 to 7: What It Costs
Initial fees, other fees, and the estimated initial investment. I break these down in How Much Does It Really Cost to Buy a Franchise?
Items 8, 12 and 16: Your Restrictions
Item 8 covers restrictions on where you buy products and services. Item 12 is your territory. Item 16 covers restrictions on what you can sell. These tell you how much control you’re really giving up.
Item 11: Training and Support
What the franchisor does for you before and after opening, including advertising and computer systems.
Item 15: Your Role
Whether you’re required to run the business personally. This matters a lot if you plan to keep your job.
Item 17: Renewal, Termination and Transfer
How long the deal lasts, how it can end, what it takes to sell, and how disputes get resolved.
Item 19: Financial Performance Representations
This is where a franchisor can share sales or earnings data. It’s not required. But if a franchisor makes earnings claims, they belong here. Read the footnotes. I explain how in How Do I Know If a Franchise Is Actually Profitable?
Item 20: Outlets and Franchisee Information
Tables showing openings, closures and transfers, plus contact info for current franchisees and those who left. The FTC calls talking to these people possibly the most reliable way to check the franchisor’s claims.
Item 21: Financial Statements
The franchisor’s audited financials. If you can’t read a balance sheet, pay an accountant to read it for you.
Items 22 and 23: Contracts and Receipt
Item 22 lists the agreements you’ll sign. Item 23 is the receipt you sign to show you got the FDD. The date on it starts your 14-day clock.
How to Use the FDD Well
- Read the whole thing, then go back to the Items above.
- Write down every question and ask the franchisor. My list is in What Questions Should I Ask a Franchisor Before I Sign Anything?
- Call franchisees from Item 20.
- Ask for any updated FDD before you sign. The FTC notes disclosures can change.
- Have a franchise attorney review the agreement.
Want Help Reading One?
If you’ve got an FDD in hand and want help knowing where to look, I’m glad to walk through it with you. No sales pitch. Call me, John Henning, at 267-417-4980.
Sources
- FTC Franchise Rule, 16 CFR Part 436 (eCFR): https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436
- 16 CFR 436.5, Disclosure items (eCFR): https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436/subpart-C/section-436.5
- FTC, A Consumer’s Guide to Buying a Franchise (Sept. 2020): https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise