Why is a franchise disclosure document important?
The purpose of a franchise disclosure document is to give the prospective franchisee as much information as possible about the franchising opportunity. This document contains financial information, information about previous litigation or bankruptcy history and details about the investment such as the specific location. Further information that it may contain includes the initial capital investment, proprietary information, systems and processes, intellectual property, trademarks and copyrights, etc.
When should a potential franchisee receive the FDD (franchise disclosure document)?
The franchise disclosure document in the UK is typically presented after discovery day and before the signing of the franchise agreement.
The UK franchising industry is currently unregulated, as opposed to the US. However, the process for purchasing a franchise involves some common steps including exchanging preliminary information between a franchisor and a franchisee, attending a discovery day and signing the franchise agreement once all the parties have agreed to work together.
What items should a franchise disclosure document include?
In the US, the FDD is, by law, required to contain 23 items and there is a very specific time frame for sharing this document with a prospective franchisee. In the UK, however, a franchisee will receive a franchise disclosure document prior to signing a franchise agreement. For those curious about what is included in a franchise disclosure document specifically for the UK, the answer is several important sub-sections. These include: the business experience of the franchisor, any disputes that the franchise is involved in, franchise fees, details on existing franchisees, financial statements and whether the franchisor will participate in the actual operation of the prospective franchisee’s business.
How often must a franchise disclosure document be updated?
While some suggest that this document should be updated at least once a year, more frequent changes may need to be made and the most recent version should always be handed to a prospective franchisee to ensure that they have the most current information available to them to enable them to make their investment decision.
Franchise disclosure documents are living documents that undergo changes as and when a franchisor makes changes to their offering or if there are any changes or updates to their franchise business. Therefore franchise disclosure documents will not be set in stone but will continuously be updated. The FDD that you provide a prospective franchisee should be the latest revised version available.
What is the difference between a franchise agreement and a disclosure document?
Although a franchise agreement and a disclosure document may seem to be the same thing, they differ in multiple respects. A franchise agreement is the final contract that is signed between a franchisor and a franchisee in order to begin their business relationship. A franchise disclosure document, on the other hand, is informative and enables the franchisee to make a more informed decision about the investment opportunity. Therefore, when it comes to an FDD vs a franchise agreement, these terms are vastly different, contain different sets of information and have different legal implications.
