The Federal Trade Commission’s Franchise Rule requires franchisors to provide each prospective franchisee with a franchise disclosure document (FDD) at a certain point early in the process of offering and selling a franchise. The FTC Franchise Rule specifies the content and format of the FDD.
The FTC Franchise Rule contains lengthy and detailed requirements for the preparation of an FDD. They include instructions relating to the form and the substance of the FDD, and in some cases they provide specific language to be used for certain disclosures. The FDD is required to be organized into 23 items, and is required to include certain attachments. This page provides a quick overview.
The complete FTC Franchise Rule and related materials can be found online. See Other Resources on the U.S. Franchise Law Basics page.
Laws in more than a dozen states also require franchisors to provide a similar disclosure document. All of these states accept the FDD format for the disclosure document, with certain changes necessary to comply with state law.
Item 1: The Franchisor, and Any Parents, Predecessors, and Affiliates
This item includes certain information about the franchisor, its parent, predecessor, and some of its affiliates.
For purposes of this item, a "parent" means "an entity that controls another entity directly, or indirectly through one or more subsidiaries," and a "predecessor" is a person or entity from which the franchisor acquired the major portion of its assets. The relevant affiliates for this item are those that offer franchises in any line of business, and those that provide products and services to franchisees.
The franchisor is required to disclose:
the names and business addresses of the franchisor, its parent, predecessors and affiliates
the names the franchisor uses to conduct business
the names and address of the franchisor's agents for service of process
the type of entity, and state of formation of the franchisor
the business of the franchisor, and its other business activities
the business the franchisees will operate
the general market for the products or services offered by franchisees
any legal regulations that apply specifically to the franchisees industry
the prior business experience of the franchisor and its predecessor and affiliates
Item 2: Business Experience
This item lists the directors, trustees, general partners, principal officers and other executives who will have management responsibility relating to the franchises. It also gives a 5-year employment history for each person. The "principal officers" generally include:
chief executive officer;
chief operating officer;
chief financial officer;
officers responsible for franchise marketing;
officers responsible for franchisee training; and
officers responsible for franchise operations.
Item 3: Litigation
In this Item, the franchisor must disclose certain litigation involving:
certain parents and affiliates, and
any person identified in Item 2.
The relevant litigation includes currently pending cases and those that were pending within the last 10 years that involve claims for violations of franchise, antitrust or securities law, or claims for fraud, unfair or deceptive practices, or similar allegations.
Item 4: Bankruptcy
The franchisor must disclose in Item 4 any bankruptcy in the last 10 years of:
any person identified in Item 2, and
any company for which a person identified in Item 2 was a principal officer or director within a year of its bankruptcy.
Item 5: Initial Fees
This item discloses the initial franchise fee, and any other fees or payments a franchisee will pay to the franchisor for goods or services before beginning the franchised business. If the initial fee is not uniform for all franchisees, this item must describe a range of fees, and/or how the fee is determined.
Item 6: Other Fees
This Item consists mostly of a chart that is required to list all of the other fees that the franchisee is required to pay to the franchisor or its affiliates. Typical fees include:
additional training fees,
audit fees, and
late payment fees.
Item 7: Estimated Initial Investment
In Item 7, the franchisor must provide a chart setting out by category an estimate of the initial investment that the franchisee must make before the opening the franchised unit. Typical categories included in this chart are:
initial franchise fee;
expenses during training;
furnishings, décor, and equipment;
business licenses; and
additional working capital needed for a reasonable initial phase of the business (at least 3 months).
Item 8: Restrictions on Sources of Products and Services
Item 8 describes whether the franchisee is required to purchase or lease goods or services from the franchisor or its affiliates, or from suppliers designated or approved by the franchisor, or according to the franchisor’s specifications. For each of these categories, the franchisor must disclose:
the goods or services involved;
the manner in which the franchisor issues and modifies specifications for these goods and services;
the manner in which the franchisor grants and revokes supplier approvals;
whether the franchisor or its affiliates are approved suppliers for any goods or services;
whether the franchisor or its affiliates are the only approved suppliers for any goods or services;
whether the franchisor or its affiliates receive any benefits as a result of required purchased by franchisees (and if so, a description of these benefits); and
the estimated proportion of these required purchases and leases compared to all purchases and leases by the franchisee in setting up and operating the franchised business.
Item 9: Franchisee's Obligations
This item lists in chart form the sections of the franchise agreement and other agreements that specify the franchisee's principal obligations in 24 different categories. These categories include:
site selection and acquisition / lease;
pre-opening purchases / leases;
site development and other pre-opening requirements;
initial and ongoing training;
compliance with standards and policies / operations manual;
trademarks and proprietary information;
restrictions on products / services offered;
warranty and customer service requirements;
territorial development and sales quotas;
ongoing product / service purchases;
maintenance, appearance and remodling requirements;
owner's participatoin / management / staffing
records and reports;
inspections and audits;
non-competition covenants; and
dispute resolution (arbitration, mediation and litigation).
Item 10: Financing
The franchisor must describe in Item 10 any financing offered directly or indirectly to the franchisee by the franchisor or its affiliates. If any financing is offered, there are disclosure requirements for the details, such as:
what the financing covers;
the amount of financing offered;
the interest rate;
the repayment terms;
the nature of any required security interest;
whether any personal guaranty is required;
any prepayment penalty; and
liabilities upon default.
Item 11: Franchisor's Assistance, Advertising, Computer Systems and Training
This item describes some of the franchisor’s principal obligations under the franchise agreement, and it provides considerable details about certain aspects of the franchisor’s system. The first part of Item 11 lists the services the franchisor is contractually obligated to provide to the franchisee before the opening of the franchisee’s business. The next part lists the services the franchisor is contractually obligated to provide after the opening.
The remainder of Item 11 will include detailed information about:
the franchisor’s advertising program;
any required computer system or electronic cash registers;
the operations manual;
site selection criteria and procedures;
the typical length of time between signing the franchise agreement and opening the franchised unit; and
the franchisor’s training program.
Item 12: Territory
In Item 12, the franchisor must describe the franchisee’s rights and restrictions relating to the franchisee’s location and territory. The required disclosures include:
any exclusive territory granted to the franchisee;
whether the franchisor can establish any other franchised units using the same marks, or selling the same products or services using different marks;
whether the franchisor can establish any company-owned units, or other methods of distribution using the same marks, or selling the same products or services using different marks;
conditions for relocating the franchised unit;
restrictions on the franchisee from accepting orders from outside its territory;
any right of first refusal by the franchisee to acquire additional units or territory; and
any sales quotas or market share quotas imposed on franchisees.
Item 13: Trademarks
This item discloses certain information about the franchisor’s principal trademarks and service marks the franchisee will use. For example, this item must state whether the marks are registered on the principal register of the U.S. Patent and Trademark Office. This item must also disclose whether there are:
any determinations by any trademark office, appeal board, or court affecting the marks;
any pending infringement, opposition or cancellation proceedings relating to the marks;
any pending litigation about the marks;
any agreement which limit the franchisor’s right to the marks; and
any prior use or infringing use of the marks by others.
Item 14: Patents, Copyrights and Proprietary Information
In Item 14, the franchisor must disclose information about any patents, copyrights, confidential information, or trade secrets relating to the franchise.
Item 15: Obligation To Participate In The Actual Operation Of The Franchise Business
Item 15 discloses whether the franchisee must personally participate in the operation of the franchised business. If the franchisee is not required to personally participate in the operation of the business, this item must state:
whether the franchisor recommends this kind of participation;
limitations on the franchise’s on-site manager;
whether the manager must complete the franchisor’s training program;
whether the manager must own any equity interest in the franchisee entity; and
any restrictions the franchise must place on its manager.
Item 16: Restrictions On What The Franchisee May Sell
Item 16 describes any restrictions or conditions the franchisor imposes on the goods or services the franchisee can sell, or on the customers the franchisee can sell to. Examples of the types of disclosures required in this item are:
whether the franchisee must sell only the goods and services approved by the franchisor;
whether the franchisee must sell all of the goods and services approved by the franchisor; and
whether the franchisor has the right to change the type of authorized goods and services.
Item 17: Renewal, Termination, Transfer And Dispute Resolution
Item 17 consists primarily of a table that summarizes the key provisions in the franchise agreement and other agreements relating to 23 specified categories, and provides references to the relevant sections of the agreements. The categories include:
length of the franchise term;
renewal or extension of the term;
requirements for franchisee to renew or extend
termination by franchisee;
termination by franchisor without cause;
termination by franchisor with cause;
franchisee's obligations on termination / non-renewal;
assignment of contract by franchisor;
transfer by franchisee -- defined;
franchisor’s right of first refusal to acquire franchisee’s business;
death or disability of franchisee;
modification of the agreement; and
Item 18: Public Figures
Item 18 requires the franchisor to disclose whether it uses a famous person in the franchise’s name or logo, or whether it uses a famous person to endorse the franchise. If the franchisor does use a public figure for either of these purposes, it must disclose:
the compensation paid or promised to the public figure;
the public figure's involvement in the management or control of the franchisor; and
the amount of the public figure’s investment in the franchisor.
Item 19: Financial Performance Representations
The franchisor is not required to provide any information to a franchisee prospect about actual or potential sales, costs, income or profits of the franchised business. But, if the franchisor chooses to provide this kind of information, the information must be stated in full in Item 19. This information (called a "financial performance representation") must include a description of the factual basis for the information, and a description of all material assumptions.
Item 20: Outlets and Franchisee Information
In Item 20, the franchisor must disclose:
a table showing the total number of company-owned units and franchised units for the last 3 years;
a table showing the number of franchise transfers in each state for the last 3 fiscal years;
a table showing the number of franchises in each state for the last 3 fiscal years that were opened, terminated, not renewed, re-acquired by the franchisor, or otherwise ceased operations;
a table showing the company-owned units in each state for the last 3 fiscal years;
a table showing the number of new franchises predicted for the upcoming year in each state;
a list of all franchisees (up to 100) including name, address and phone number;
the name, home address and phone number of every franchisee who voluntarily or involuntarily ceased to be a franchisee during the last year, or who has not communicated with the franchisor within the last 10 weeks;
certain disclosures regarding confidentiality agreements signed by franchisees, and certain franchisee organizations.
Item 21: Financial Statements
This Item requires the franchisor to include financial statements prepared by an independent accountant or CPA according to U.S. generally-accepted accounting principles. These statements must normally include:
balance sheets as of the end of the last 2 fiscal years;
statements of operations for the last 3 fiscal years;
statements of stockholders' equity for the last 3 fiscal years; and
cash flow statements for the last 3 fiscal years.
If the most recent balance sheet and statement of operations are older than 90 days, more current unaudited financial statements for the interim period may also need to be provided. There is a phase-in period for the audit requirement under the FTC FRanchise Rule and state laws in many states. However, 5 states required audited financial ststements from the outset.
Item 22: Contracts
Item 22 requires the franchisor to include in the FDD a copy of all proposed agreements relating to the franchise offering.
Item 23: Receipt
This item requires the franchisor to include as the last page of the FDD a form for an acknowledgment of receipt to be signed by the prospective franchisee as proof of receipt of the FDD.
The FDD typically includes attached exhibits. At a minimum, these exhibits will include:
financial statements (see Item 21);
the form franchise agreement (see Item 22);
forms for any other agreements required to be signed by franchisees or their owners (such as personal guaranties, confidentiality agreements, non-competition agreements, software licenses, and development agreements) (see Item 22); and
receipt form (see Item 23).
In a multi-state offering, the exhibits might also include:
a list of franchise regulators in each state;
a list of the franchisor’s agents for service of process in each state; and
state-specific addenda required to conform the FDD to applicable state law.
If not already included in the body of the FDD, the exhibits should also include:
the table of contents of the franchise operations manual (see Item 11); and
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