The Federal Trade Commission requires a franchise owner to provide a prospective franchisee with information to allow the potential buyer to make an informed decision.
The information provided is in a franchise disclosure document. The FDD is part of the FTC franchise rule.
The FTC requirements include 23 points the FDD must cover. These points include information about the franchisor, including the management team and corporate structure. They also include details about any current court cases and bankruptcies and financial documents.
The FDD also needs to go over the costs of the franchise and the investment required. It also will outline information about vendors, supplies, goods and the general supply chain.
The document must provide the obligations of the franchisee and financing details. It also will cover the help the franchisor will offer, the sales area for the franchisee, intellectual property rights and obligations and restrictions for the franchisee to run the business.
The FDD will include general details about financial performance, marketing and managing the franchise agreement. It will also note any contracts associated with the deal.
The idea behind the FDD is to provide a clear picture to potential investors about what they are buying into. It provides a look at the business and gives the prospective franchisee a solid look at what he or she is buying and allows that person to make a decision based on the facts. The goal is to prevent someone from jumping into this type of financially risky deal without completely understanding it and knowing upfront the limitations and obligations of running this type of business.