What is a Franchise Disclosure Document?

The Franchise Disclosure Document Details Important Information for Prospective Franchise Owners

A Franchise Disclosure Document (FDD) is a 100–200-page legal document that details important information about a franchise. Before you consider investing in a franchise, you need to read the entire document, ideally with the help of a franchise attorney or broker. In order to provide you with all the information that you need to make an informed decision, all franchises have a FDD.

Under Federal Trade Commission regulations, the Franchise Rule states that franchisors must disclose the FDD to the prospective franchise owner two weeks prior to the signing of the franchise agreement or payment of any fees. The 14-day period commences when the franchisee signs the franchise FDD receipt page contained in Item 23.

Item 19 of the Franchise Disclosure Document

There are 23 items in the FDD. Item 19, which discusses financial performance, is very important but some brands leave it out. It can be a bit controversial and elicit fear in some franchisors because it answers the question most prospective franchise owners have: How much money can I make with this franchise? This section of the disclosure document shows you how profitable a franchise can be. Since there is no standard format for this section, it significantly varies from brand to brand.

There is an added level of transparency when Item 19 is included. But there are reasons why it is left out. Some brands may omit it because they are newer franchises. Additionally, there may be other circumstances like a pandemic, for example, that hit a brand particularly hard. No matter the reason for leaving out Item 19, you shouldn’t dismiss a franchisor for not including it. Instead, find out why it was omitted and use your judgment to determine if it’s a reasonable explanation.

23 Sections of the FDD

You may be wondering what you should look for in franchise disclosure documents. The 23 sections of the FDD are: 

What is a Franchise Disclosure Document?

The FDD meaning is simple: an important legal document that details every aspect of a franchise opportunity you need to know before investing. The disclosure document is 100-200 pages long and contains 23 items that provide potential investors with a history of the franchise, legal disputes the franchisor has been involved in, financial performance (item 19), royalty fees, and so much more. According to the FTC’s Franchise Rule, prospects must be provided with the FDD at least two weeks prior to signing the franchise agreement or paying fees. 

Part of the due diligence process before investing in franchise ownership is speaking with a Franchise Consultant. Not only do these professionals help determine if franchise ownership is right for you, but they are also a top source of conversion. When done well, referral marketing can result in a 10 percent to 30 percent increase in sales.