What is the difference between the Franchise Disclosure Document and the Franchise Agreement? The Franchise Disclosure Document is a large document comprised of several federally mandated components, which include the Franchise Agreement. The Franchise Disclosure Document is required to have twenty-three disclosure items, all contracts that the franchisee will be required to sign, financial statements of the franchisor (usually audited), the table of contents of the Operations Manual, a listing of the training topics you will receive and hours for each topic, a list of all franchisees in the system and any franchisees who have left the system, along with any state required disclosures.
Items Of The Franchise Disclosure Document
The items of the Franchise Disclosure Document are the disclosures that the Federal Trade Commission in its Franchise Rule has mandated be provided to any prospective franchisee. Item 1 consists of a disclosure of the background of the franchise and the franchisor company, its parents and affiliated companies, along with information about competition and regulations in the franchise’s industry. Item 2 describes background about the people involved in the franchise. Items 3 and 4 disclose and required litigation and bankruptcy. Items 5 through 7 are the financial disclosures (fees payable to the franchisor and expenses that a new franchisee can expect to open the business and operate it typically in the first few months). The remaining items disclose the definition of the territory, franchisees obligations to the franchisor, all trademarks and patents of the franchisor and other important information. For a detailed description of all of the Items of the FDD, please listen to the podcasts I gave which are found on the Nancy In The Media page.
The franchise agreement is your actual contract with the franchisor. This is the document that will define your relationship with the franchisor. It contains the terms with which you must comply for the duration of the agreement. It will contain terms such as the franchise fee you will pay, the royalty payments you must make and frequency, any advertising fund expenditures you must make (including national, regional and local), your territory, restrictions on the purchase of products and services, your obligations to the franchisor, franchisor’s promises to you, your rights to transfer the franchise agreement, your rights to renew the franchise agreement and all other aspects of the contractual relationship between you and the franchisor. Many times the Franchise Agreement will not be negotiable, particularly if the system is a mature system. However, it is still very important to have an attorney review the documents as the last step in validating the franchise opportunity.
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