UBC Law Review

UBC Law Review

& Franchise Law Review

A Review of Franchise Disclosure Documents

If you have been shopping around for a franchise, or have attended any franchise expos in your research to select the perfect business opportunity for you, then you’ve come across a few Franchise Disclosure Documents. If you are unfamiliar with what a FDD is, then now is your chance to get familiar, because these documents are a crucial source of information and should play heavily into your decision making process. All franchisors are legally required to provide a FDD prior to any sort of legally binding commitment between themselves and a potential franchisee.

What is the FDD?

A franchisor’s Franchise Disclosure Document is a company outline, legally required to be written in “plain [easy to read and understand] English”. This document provides a detailed overview of the franchising organization, it’s history and many specifics about its existing franchises. By law there are certain key facts that must be divulged by the FDD, regardless of how it may reflect on the franchisor.

Information About the Franchisor

Any FDD should contain a detailed overview of the parent company. Disclosed in the first few section of the FDD should be information regarding the company’s history and the way that the corporate structure is laid out. These opening sections must also divulge any law suits against the parent company by franchisees, regardless of whether or not the outcomes were favorable for the company. If the company has ever filed for bankruptcy, that information must also be disclosed. This information is required by law so that potential investors can understand exactly what they might be getting into should they pursue a relationship with an unreliable or fiscally unsound company.

Fiscal Information

Legally, there are certain financial details that must be stated within the FDD. This information includes franchising fees and start-up costs and other associated financial requirements for entering into a franchising agreement with the franchisor. Franchisors are not required to divulge any information that might be construed as a guarantee or even a speculation as to expected ROI. Doing so would make the franchisor vulnerable to lawsuits from failed franchisees.

What the franchisor will have to disclose is information regarding the average earnings of franchises across certain geographical areas. This information is useful for gaining an idea of what one might potential see, as far as profits are concerned, from a franchise in any given location. Those figures represent only potential and are in no ways guarantees of ROI.

Importance of the FDD

If you are even partially considering a franchising organization as a potential for your new business then you should request a copy of the company’s FDD (if one hasn’t been provided already) and read it. Then take the FDD and read it again. Once you’ve done that, take the FDD and read it a third time. That is how important this document should be to your decision making process. Read it, comprehend it, ask questions to the company’s representative if you are unclear about anything in it, take it to your attorney and have him or her review it. The Franchise Disclosure Document is your key to making an informed and intelligent investment choice.