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Franchise Disclosure Document

Preparation of the Franchise Disclosure Document (FDD) and Franchise Agreement

 

The FTC requires 23 “items” to be disclosed in the FDD concerning the Franchisor and provisions contained in the Franchise Agreement. We advise you concerning the terms of the franchise relationship. The system and processes used by us in preparation of the FDD documents ensure that all aspects of your business are fully identified and properly disclosed. 

 

The FDD, Franchise Agreement and Exhibits are prepared in conformance with the FTC Franchise Rule.

 

1 The Franchisor, It's Predecessors And Affiliates
2 Business Experience
3 Litigation
4 Bankruptcy
5 Initial Franchise Fee
6 Other Fees
7 Initial Investment
8 Restrictions On Sources Of Products And Services
9 Franchisee's Obligations
10 Financing
11 Franchisor's Obligations
12 Territory
13 Trademarks
14 Patents, Copyrights and Proprietary Information
15 Obligation To Participate In The Actual Operation Of The Franchise Business
16 Restrictions On What The Franchisee May Sell
17 Renewal, Termination, Transfer And Dispute Resolution
18 Public Figures
19 Earnings Claims
20 List Of Outlets
21 Financial Statements
22 Contracts
23 Receipt

 

Preparation of Exhibits to the FDD & Franchise Agreement

 

The following exhibits and attachments to the FDD and Franchise Agreement are prepared by our attorneys based on your operation and system:

• Initial Payment Agreement
• Confidentiality & Non-Competition Agreement
• Area Development Agreement 
• Lease Assignment
• Operation Manual Table of Contents
• Franchisee Compliance Certification
• List of State Administrators
• List of State Agents for Service of Process
• State Specific Addendum to the Disclosure Document
• State Specific Addendum to the Franchise Agreement

 

The State Specific Addendum to the Disclosure Document and Franchise Agreement are prepared as part of the franchise development process to ensure compliance with individual state franchise laws when registering in the Registration States. The State Specific Addendum address individual state franchise laws and regulations that vary from the FTC Franchise Rule relative to specific provisions of the Franchise Agreement and/or disclosure requirements. These documents help expedite the registration process.

 

Area Developer Program

 

An Area Developer program permits a franchise company to sell multiple franchises to a single franchisee for development over a prescribed time period.  A percentage of the franchise fee for each franchise to be opened is typically paid in the form of a Development Fee upon execution of the Area Development Agreement.

 

State Exemption Filings

 

Of the non-registration states, five states require Franchisors to complete an “exemption filing” prior to commencing the sale of franchises in their state.  The filing is required under each state’s business opportunity laws. 

 

                       1. Kentucky   2.Utah 3.Texas 4.Florida 5.Nebraska

 

Trademarks, Service Marks & Copyrights 

 

As part of the legal document development process, we advise you concerning trademarks, service marks and copyrights that your company may license to Franchisees. Our trademark attorney files a trademark registration on your behalf included in the document program. 

 

 

Franchise Reporting Requirements and Performance Standards

 

Franchisees are typically required to provide information to the Franchisor regarding sales, financial data, income and sales tax returns, and other information specified by the Franchisor. We advise you concerning appropriate reporting requirements relative to the franchise business and your operation. In addition, we provide recommendations regarding minimum performance standards, revenues and/or inventory purchasing requirements when appropriate. When performance standards and/or inventory purchasing requirements are implemented, they are included in the Disclosure Document in compliance with the FTC Franchise Rule.

 

A significant transactional change with the new FDD rules and regulations relates to the manner and time a prospective franchise buyer must have the franchise disclosure document in-hand before contacts can be signed or any money paid. The former rule said the UFOC had to be delivered at the "first personal meeting" and in-hand for at least ten business days. A separate, completed franchise agreement (with all negotiated areas and blanks completed) also had to be delivered to the prospective franchise buyer for at least five business days to comply with the old FTC rule.

Under the new FTC franchise rule, the first personal meeting requirement is eliminated entirely. Instead, a fourteen calendar day minimum review period allegedly simplifies the complexity of completing franchise transactions. But does it really? One important exception to the 14 calendar day rule minimum review period that actually expands the old "first personal meeting" requirement is the rule about a reasonably requesting franchise buyer. Upon a "reasonable request" (which is a defined term) franchise companies must give a complete FDD to a prospective franchise buyer earlier in the sales process than 14 calendar days before the franchise buyer signs or pays.

There's another seven calendar day contract review period that applies if the franchise company makes unilateral and material changes to the franchise contract or other agreement attached to the FDD.

Electronic Delivery of FDD
The new FTC Rule permits delivery of the Franchise Disclosure Document by electronic means, such as by email or downloading from a website. The cover page of the FDD now contains the franchise company's website and email address, if the company has these. Finally, the new Rule allows a prospective franchise buyer to “sign” a FDD receipt electronically.

There are some FDD electronic prohibitions: Disclosures must not include electronic features such as pop-up windows, audio, video, and links to external documents. However, features that enable a prospective franchise buyer to review the FDD efficiently are allowed - things like scroll bars, search features, and internal links (for example, links between the Table of Contents and the specific FDD items).

FDD Record Keeping Requirements
Under the new FTC Rule, for every completed franchise sale, franchise companies must keep a copy of the signed receipt page (Item 23) of the FDD for at least three years. Franchise companies are also required to retain a sample copy of each materially different version of their FDD for at least three years after the close of the fiscal year when the FDD was last used.
 

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