Franchise Disclosure Documents (FDD)
Mission Accomplished?

By: Kevin B. Murphy, Franchise Attorney, MBA - Mr. Franchise

Franchise Disclosure Documents (FDD) under the FTC's new Franchise Rule continue to be a good concept in theory. Unfortunately, reality plays a more important role and reveals an entirely different picture.

Here are some of my observations, based on twenty-eight plus years of experience in the franchise industry as a franchise attorney, franchise expert and former franchise owner. During this time, I’ve drafted, reviewed and negotiated over 500 Franchise Disclosure Documents.

Franchise Disclosure Goals

Franchise Disclosure Documents or FDD (formerly known as Uniform Franchise Offering Circulars) are a document containing twenty-three chapters of information. These disclosures are intended to give prospective franchise buyers enough pre-sale information so an intelligent franchise investment decision can be made before long-term contracts are signed, money changes hands and sizeable financial commitments are made. In most cases, a franchise investment has long-term financial consequences. It means putting everything on the line - savings, retirement accounts, home equity, etc. With all this at stake, it's easy to see why the disclosures in the FDD are so important.

Aura of Credibility

Attached as exhibits to the FDD are the franchise company’s audited financial statements, franchise agreement, and a list of operating (and departed) franchise owners. If the company elects to make a franchise "Earnings Claim," that information will be set forth either in Item 19 or attached as another exhibit. The entire document is quite lengthy and can exceed several hundred pages. In certain states (known as franchise registration states like California, New York, Illinois, etc.) the FDD makes reference to being registered with the state. All these formalities creates an aura of credibility. Many franchise buyers assume a regulatory agency has reviewed and approved the franchise offering. Unscrupulous franchise companies engage in blatant misrepresentation, referring to their franchise registration with a state as that state's "stamp of approval." Nothing could be further from the truth.

Franchise Registration Realities

First of all, registration of a company’s Franchise Disclosure Document only means they’ve paid a registration fee to a governmental agency and submitted their document. There are no standards a franchise company must meet before it can sell franchises, such as business experience, financial stability, operating a successful prototype for a certain period of time before franchising, etc.

Business Experience and Financial Stability?

You and I could have no experience in a business concept, and never operated a prototype. All we have is an idea to franchise, letting other people (franchise buyers) risk their savings, homes, etc. to see if our idea pans out in the marketplace. All we need to do to franchise is put together a Franchise Disclosure Document, and capitalize our new franchise corporation or LLC. Let's say we don't want to risk anything ourselves, so we decide to capitalize our new franchise corporation with only $1. After producing an audited financial statement (showing $1 cash and stock issued for $1), and including this financial in our Franchise Disclosure Document, we’d be able to sell franchises with impunity and collect our $50,000 franchise fee every time we sell a franchise.

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