What Is a Franchise Disclosure Document and Where Do You Find Yours?

What Is a Franchise Disclosure Document and Where Do You Find Yours?

If you bought your franchise from the franchisor, you probably signed a receipt for a franchise disclosure document, and a buyer of your franchise may want to read the current one. What is a franchise disclosure document? It is the franchisor's own description of its system, in 23 items, and the Franchise Rule requires franchisors to give one to prospective franchisees (the FTC's Franchise Rule page, ftc.gov). It describes the system, not your location. This article covers what is in it, where to find yours, and what a buyer takes from it.

What is a franchise disclosure document?

It is the document a franchisor must give a prospective franchisee, containing 23 specific items of information about the franchise, its officers and other franchisees. That is how the FTC's Franchise Rule page puts it (ftc.gov). Franchisors and buyers shorten it to FDD.

Three points help a seller:

• The franchisor writes it. It is the franchisor's account of the franchise offer, not yours and not ours.
• It has a fixed order. The rule lays out the 23 items by number and heading (16 CFR 436.5). The renewal, termination and transfer terms sit under Item 17 wherever you look for them.
• It ends in a receipt. Item 23, Receipts, asks for two copies of a detachable acknowledgment of receipt as the last pages. If you signed a receipt, it was for the version you were given when you bought.

What are the 23 items?

Each item has a fixed heading in 16 CFR 436.5. Grouped by what a reader is trying to learn, they run like this:

• The franchisor. Item 1, the franchisor and any parents, predecessors and affiliates. Item 2, business experience. Item 3, litigation. Item 4, bankruptcy.
• What it costs. Item 5, initial fees. Item 6, other fees. Item 7, estimated initial investment. Item 10, financing.
• How the system runs. Item 8, restrictions on sources of products and services. Item 9, the franchisee's obligations. Item 11, the franchisor's assistance, advertising, computer systems and training. Item 15, the obligation to participate in the actual operation of the franchise business. Item 16, restrictions on what the franchisee may sell.
• What you get. Item 12, territory. Item 13, trademarks. Item 14, patents, copyrights and proprietary information.
• How the relationship ends or changes. Item 17, renewal, termination, transfer and dispute resolution.
• What the system looks like. Item 18, public figures. Item 19, financial performance representations. Item 20, outlets and franchisee information. Item 21, financial statements.
• The paperwork. Item 22, contracts. Item 23, receipts.

For a franchise owner who is thinking of selling, we pick out four items.

Item 12, territory. It sets out what the franchisor must disclose about territory. Our article on how to sell a franchise territory takes it from there.

Item 17, renewal, termination, transfer and dispute resolution. This is where the franchisor summarizes the franchise relationship in a table. Its transfer rows are labeled "Transfer" by franchisee, defined; franchisor approval of transfer by franchisee; conditions for franchisor approval of transfer; and franchisor's right of first refusal to acquire franchisee's business (paragraph (q), rows (k) to (n)). Those labels tell you which questions the document answers. They do not tell you what your franchisor's answers are. Read your own, then ask the franchisor in writing and have a franchise attorney read the reply.

Item 19, financial performance representations. The rule text says a franchisor is permitted to provide this information, so a document may or may not carry figures. Our article on franchise Item 19 explained covers what it means for your numbers.

Item 20, outlets and franchisee information. Its tables report outlets in the system, including transfers of outlets from franchisees to new owners (paragraph (t)). We cover it in a separate article written for franchisors.

Where do I find my own franchise disclosure document?

Start with three places, in this order:

1. The copy you were given when you bought, if you have one. It describes the system as it stood then, and it is likely out of date.
2. A current copy from your franchisor. Ask in writing for the current document. It is the one a buyer is likely to read, and the one to compare with your old copy.
3. A state filing, where a state takes them. California's Department of Financial Protection and Innovation says the Franchise Investment Law governs the offer and sale of franchises in California, and links a franchise filing system. The page does not say what the public can view there. Whether your state takes filings, and what it lets the public see, is on that state's own site.

Write down every difference between your old copy and the current one. A buyer who reads only the current document will notice what you did not.

Does a buyer of my franchise get a franchise disclosure document?

What franchisors give a buyer of an existing franchise may differ from one franchisor to the next.

What the rule says is narrower. Section 436.1(t) defines the "sale of a franchise" to exclude "the transfer of a franchise by an existing franchisee where the franchisor has had no significant involvement with the prospective transferee," and adds that approving or disapproving a transfer is not by itself significant involvement (16 CFR 436.1). The 14 calendar-day rule in section 436.2 is written for a prospective franchisee dealing with a franchisor or its affiliate. Whether those words reach your sale depends on facts about your franchisor's part in it. That is for a franchise attorney.

What you can do without a lawyer is ask the franchisor, in writing, what it gives a buyer of an existing franchise and when. A buyer may ask for the document whether or not the franchisor offers it.

What does a franchise disclosure document tell a resale buyer about my franchise?

It tells a buyer about the system, not about your location. That difference is the useful part for a seller, because a buyer who has read the system's document arrives with questions your numbers cannot answer alone.

Here is how a buyer may read it.

• Item 17 tells a buyer what the franchisor has to say yes to. The transfer rows above are the buyer's map of the approval. If your franchisor's answers are not what you assumed, you want to know before the buyer does.
• Item 19 gives a buyer a system number to hold against yours. If the document gives figures, a buyer may compare your location with them. If it gives none, that is also a fact a buyer can see.
• Item 20 shows a buyer how the system has behaved. Transfers of outlets from franchisees to new owners have their own table, and the status of franchised outlets has another (paragraph (t)). A buyer reading them is looking at the system and not at you.
• Item 12 shows a buyer what the territory is. A buyer can compare it with what you describe.

None of this is a reason to wait for a buyer to raise it. The way to use the document is to read your franchisor's current version before you list, mark where your location differs from what it describes, and be ready to say why.

A valuation looks at your location, and the disclosure document looks at the system. Both may be in front of a buyer, so having a number for yours can help you read the other.

What should I do first?

Four steps, all within your control:

1. Find your old copy and any receipt you signed.
2. Ask your franchisor in writing for its current document, and what it gives a buyer of an existing franchise.
3. Read Items 12, 17, 19 and 20 in the current copy and mark any difference from your old one.
4. Get a current number before you speak to a buyer.

A free Opinion of Value is that number, and it commits you to nothing. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor, free and with no card on file. Request your free Opinion of Value and tell us what you know about your disclosure document.

If you decide to sell, we help with buyer screening, due diligence and offer negotiation, franchisor approval, paperwork and closing steps, and confidentiality is available throughout. Our sell a franchise page shows how we work with owners.

For the law on any of this, your franchise attorney is the person to ask. This article is general information, not legal advice.

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