What is an FDD Review?
A Franchise Disclosure Document (FDD) is a legal document that franchisors have to give to prospective franchisees before they sell a franchise. It’s a contract between both parties, and it contains all the essential information franchisees need to know about the brand, such as their respective duties.
Getting an FDD reviewed by a franchise lawyer is important for franchisees to do because the document contains 23 items and can be several pages in length. If you find yourself about to enter a franchise agreement, you want to ensure you understand it all so that you minimize your risks and have peace of mind that you’re making the right business decision.
Read the rest of this article to understand what an FDD review entails and how a lawyer can help you to ensure it’s legally sound and protects your interests.
What Does an FDD Contain?
There are various steps involved when reviewing the FDD. As a franchisee, you have 14 calendar days in which to review it to ensure you understand all its terms. You will then contact the franchisor to confirm you understand the agreement.
Here are the FDD's 23 items.
- Item 1: Franchisor information. This includes all the information about the franchisor and the franchise system’s history to give you a better idea about the brand.
- Item 2: Franchisor business experience. The franchisor’s management team is described so you can learn more about their competency of the team and who’s involved in it.
- Item 3: Litigation history. This section includes litigation information regarding the franchisor’s history.
- Item 4: Bankruptcy information. If the franchisor or people in their management team have ever filed for bankruptcy, this section will provide the information.
- Item 5: Initial fees. Here, you’ll learn about all the fees the franchisee has to pay, including those that need to be paid before opening the business.
- Item 6: Additional fees. This includes other fees you’ll have to pay, such as technology fees, on-going royalty fees, and others.
- Item 7: Investment estimates. These include estimates of the costs you’ll have to pay when establishing and opening your business.
- Item 8: Restrictions. Read through information about services and/or products you will or won’t sell from the business. This provides clarity on your supply chain.
- Item 9: Obligations and duties. This section provides information about your legal duties and rights under the agreement.
- Item 10: Financing. This specifies if the franchisor can offer financing to the franchisee.
- Item 11: Franchisor support. What services will the franchisor provide to help the franchisee before and after opening the business? These should be detailed in this section.
- Item 12: Territories. The franchisee might be given a protected territory, in which they won’t be competing with other franchisees in the location.
- Item 13: Trademarks. This includes any franchisor trademark information, such as if they’re registered and protected.
- Item 14: IP assets. This includes the franchisor’s IP asset information.
- Item 15: Daily operations. This specifies if the franchisee will take part in daily activities of the business.
- Item 16: Franchisor control. Basically, how much control the franchisor has over what is sold in the business.
- Item 17: Renewal, termination, transfer, and dispute resolution. These include the franchisee rights related to the agreement duration, renewal rights, termination of the agreement, and non-compete obligations. It also includes dispute resolution methods.
- Item 18: Public figures. This section specifies if there are any public figures who promote the business.
- Item 19: Financial performance. Does the franchisor make financial performance representation? This is information a franchisor gives regarding the franchisor’s outlets’ financial performance.
- Item 20: Outlets. Summary of the history of the franchisor’s outlets.
- Item 21: Financial records. The franchise company’s financial statements.
- Item 22: Contracts. These include all legal contracts linked to the FDD.
- Item 23: Receipts. A receipt will need to be signed by the franchisor. It records when the FDD was disclosed to the franchisee.
What Does a FDD Review Include?
When reviewing an FDD, you’ll want to look for important elements to ensure that signing the agreement is a sound business decision.
Scrutiny of Each Item
A review entails going over all 23 items in the FDD closely to ensure there is no vague language or anything included that’s challenging to understand or a potential red flag.
You want to take your time to go through everything.
Here are some things to look for during your review:
- The leadership’s industry experience and background so you can see if there’s anything concerning.
- Warning signs related to litigation, such as if the franchise has been involved in many lawsuits.
- All costs and fees so you can gauge if you’re able to purchase and operate the business.
- What the franchisor will be responsible for so that you know what you’ll gain from the agreement.
- The territory, so you’ll know if you’re going to be competing with another franchisee.
- Financial statements. Check that the franchisor has enough finances to provide support and that they have been growing and improving over the last few years.
- Agreement terms and obligations need to be scrutinized so you can identify any risks before signing the agreement.
- Check that the FDD includes a list of contracts you’ll have to sign (Item 22).
Make a List of Questions
During your read-through, you want to make a note of any concerns or questions you have that you can discuss with your franchisor.
When Do You Need a Lawyer for an FDD Review?
You should have a legal review of your FDD after you’ve read through it. They will be able to spot any red flags before you sign the agreement.
Here is how they will assist you:
- Clarify any challenging legal terminology to ensure you understand everything in the document.
- Protect your interests so you understand potential risks and can make informed decisions.
- Ensure legal compliance. A lawyer will help you spot any red flags or non-compliance concerns.
- Prevent disputes. They’ll spot any potential pitfalls so you can avoid costly legal disputes in the future.
- Although you can’t always negotiate an FDD, your lawyer can help you with any parts of the document that you’d like changed.
Where Can You Find a Franchise Lawyer for an FDD Review?
Finding and working with a lawyer for your FDD review is easy on ContractsCounsel, an online legal marketplace where clients can connect with experienced, vetted lawyers.
You’ll post your project for free and wait for lawyers to send you bids. Once they do, you’ll review the lawyers’ profiles according to their expertise, years of experience, and previous review projects to find the best one for your legal requirements.
It will give you peace of mind knowing you’ve got a lawyer in your corner who will protect your interests.
