The scenario: You operate a prosperous business and believe that the concept can be successful in other markets. But given financial constraints or otherwise, you determine that franchising the business will likely result in the best return. You can envision the framework of franchising your business, but how do you present that to others. More specifically, what are you required to present to potential franchisees? Or, you have done your due diligence and are considering investing in a specific franchise opportunity. How do you learn the “nuts and bolts” of the franchise?
A Franchise Disclosure Document, or FDD, is a comprehensive (yet, single) document containing 23 specific items that must be “disclosed” to potential franchisees and touch upon all aspects of the franchise concept. The general idea behind the FDD is to ensure that a prospective franchisee is presented with all information related to the franchise concept, thus allowing the prospective franchisee to make an informed decision on whether or not to sign the subsequent Franchise Agreement and operate the franchise.
The expansive nature of the FDD makes it impossible to cover in a short article all that is required to be disclosed. For purposes if this article, however, it is helpful to note that a well thought out and informative FDD provides, among other things, the following items:
- Overview of type of franchise opportunity, the background and business experience of the franchisor.
- Financial stability of the franchisor (including financial statements), fees for operating and opening the franchise, including initial investment.
- Obligations of franchisor and franchisee, in addition to the future assistance to be provided by the franchisor.
- Locations and territories of the franchise, including the sourcing of product.
- Intellectual property rights of the franchisor.
- Any relevant litigation in which the franchisor is involved.
Franchising has a lot of upside, but it is not a simple venture. If one is truly interested in franchising a business, or seeking a franchising opportunity, it is imperative that experienced counsel be consulted to assist in navigating the process, from beginning to end. We can help.