Deciding to open a new business is a major decision in a person’s life. If you’re doing this, one option that you have is to buy into a franchise. This enables you to benefit from the success of the franchise, but it also comes with some very strict restrictions.
If you’re thinking about buying into a franchise, two documents are going to show up early: the Franchise Disclosure Document and the Franchise Agreement. They both matter, but they’re not the same thing—and mixing them up can cause real confusion later on.
Purpose of the Franchise Disclosure Document
The Franchise Disclosure Document, or FDD, is where the franchisor lays all their cards on the table. It’s not a contract. It’s a long, detailed report that helps you understand what kind of business you’re considering.
It covers fees, background on the company, financial history, any lawsuits they’ve been involved in and what you’d be expected to do as a franchisee. There’s a list of 23 required sections in it.
Federal rules say you have to get this document at least two weeks before signing anything. This is your time to dig through it, ask questions and walk away if something doesn’t feel right.
The Franchise Agreement is the real deal
The Franchise Agreement is a totally different document that serves a different purpose. It’s the contract that actually makes the franchisor-franchisee relationship official. Once you sign it, you’re in.
It lays out all the rules: how long the agreement lasts, where you can operate, how you’ll pay fees and what happens if things go south. A lot of the terms in the FDD will show up here, but they’re binding in the Franchise Agreement.
If you’re serious about moving forward, comparing the FDD to the final agreement is a smart move. Sometimes the contract tweaks a few things, and you’ll want to catch that before signing.
Even though these two documents are connected, they do very different jobs. One is there to inform you, and the other locks you in. Knowing the role each plays can help you go in with your eyes open. It may behoove you to work with someone familiar with franchise law so you can ensure your interests are protected.