Table of Contents
If you are buying a franchise, the franchise disclosure document is very important in obtaining information about your potential new business. Indeed, the franchise disclosure document should answer many of your questions. It will also give you an insight into how profitable the franchise you are buying might be. This article will outline what a franchise disclosure document is, what it will likely contain and how you should use that information in making legal and commercial decisions.
What is the Franchise Disclosure Document?
A franchise disclosure document (sometimes known as an ‘FDD’) is a legal document requiring the franchisor to disclose crucial information about the franchise business. As a prospective franchisee, once you receive your franchise disclosure document, you will have a set amount of time to review the document before deciding whether to enter into a franchise agreement.
What Will be in the Franchise Disclosure Document?
The 23 key points form the basis of a franchise disclosure document. Further, the table below outlines what some of those points cover.
Point |
Explanation |
The business experience of the franchisor |
This will give you a detailed account of the professional experience of the franchisor. Part of the reason why you would enter into a franchise agreement is because of the information you can receive from the franchisor on running a business effectively. As a result, the business experience of the franchisor should be a consideration when you decide whether the franchise agreement can provide value to your business. |
Any disputes that the franchise is involved in |
This is important because legal action against the franchisor can complicate their ability to do business. In some cases, it can even jeopardise the running of the business as a whole. As a result, you should make sure that any disputes that the franchise is involved in will not affect your business as a franchisee. |
Franchise fees |
Entering into a franchise agreement requires you to pay franchise fees. This can include a range of costs, such as initial fees, the cost of renting a premise, and ongoing royalties. Royalties are frequent payments, which work a bit like a subscription. Therefore, the franchise disclosure document should give you a comprehensive idea of the fees you can expect to pay. |
Details on existing franchisees |
The franchisor should also be able to provide you with the contact details of existing franchisees. This is valuable because it gives you the opportunity to contact existing franchisees to ask how they are managing their commercial and legal obligations with the franchisor. For example, they can let you know if the franchise agreement is bringing in valuable business and whether that is offsetting the franchise fees and royalties they are obliged to pay. |
Whether the franchisor will participate in the actual operation of your business |
Some franchisors will want to be involved with the actual operation of your business on a day to day basis. Therefore, the franchise disclosure document should include a section that outlines whether the franchisor intends to do this or not. |
Financial statements |
In this section, you should be able to find legal documents relating to the franchisor’s financial situation. This should include assets, liabilities, and audited financial statements. Reviewing the financials can help you decide whether the franchisor has been successful in the past and also whether the franchise fees reflect the financial health of the franchisor and franchise business. |
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
How Should I Use This Information?
As a potential franchisee, the franchise disclosure document will be one of your due diligence methods. Due diligence is the research process used to decide whether a business decision is worth making.
Therefore, in assessing the franchise opportunity, you will want to look for the:
- franchisee’s obligations (your obligations);
- franchisor’s legal obligations;
- franchisor’s assistance; and
- contact information of the franchisor and current franchisees.
As part of this process, you should always keep in mind whether the franchise opportunity is likely to be profitable. When doing so, you should also weigh up the franchise fees with the returns expected.
Key Takeaways
The franchise disclosure document is an important legal document. It will explain the details of the potential franchise agreement which you are entering into. Further, the document is usually formatted with 23 key points in mind. Therefore, you should assess each point and decide whether the franchise agreement will be a good idea for your business. The document is best used as one aspect of due diligence before deciding whether to enter the agreement. Additionally, you should contact current franchisees to hear about their experience with the franchisor.
However, if you are ever in doubt as to your legal obligations with the franchisee, it is recommended that you seek professional legal advice to avoid future disputes or problems. For help understanding the franchise disclosure document, LegalVision’s franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The purpose of the document is to provide relevant information to a potential franchisee, such as franchise fees and the financial situation of the franchisor’s business.
The document should guide you as part of your due diligence process. You can also inquire on important topics after you see the franchise disclosure document, such as legal obligations and franchise fees.
We appreciate your feedback – your submission has been successfully received.
