Prepared by: What is the FDD?
Hooray! You re application has been approved! You re ready to learn how to run a Pretzelmaker franchise. Right now is probably one of the busiest times in the life of your pretzel franchise you re meeting with management, shadowing other franchisees, and learning all you can about making delicious snacks. By the end of this learning period, you ll meet with management and sign the franchise agreement. As you re reaching for the pen, ready to sign on the dotted line, you stop. There was something else you were supposed to do. What was it? Gasp! You never got around to reading the Franchise Disclosure Document! With everything else that was going on, you completely forgot! GREAT AMERICAN COOKIES 2
Why Is the Franchise Disclosure Document Important? While we all put off paperwork, the Franchise Disclosure Document (FDD) is vital to your business. It s the one thing you don t want to forget to read. It contains disclosures that the Federal Trade Commission requires franchisors to provide franchisees before signing any legally binding agreements or paying any money. When you sign the Acknowledgment of Receipt of the FDD, you are acknowledging that you have received, read, and understood the FDD in its entirety. Because the FDD summarizes important information about the franchise agreement you will sign and the franchise relationship you will enter into, it s imperative to read it and understand it. We also recommend that you hire an attorney to review the FDD. The Franchise Disclosure Document While the FDD provides a lot of information which will help you decide if you want to invest in the franchise, we know that legal paperwork can be difficult to trudge through and even more difficult to understand. To help you overcome this intimidating obstacle, this section will walk you through each part of the FDD. By the time you finish reading this guide, you will have a better understanding of some of the information contained in the FDD. WHAT IS THE FRANCHISE DISCLOSURE DOCUMENT? The FDD contains all of the information that your franchisor is legally obligated to provide to you under federal and state franchise laws. It contains important information about the franchisor, its affiliates and the franchise that you are about to purchase. The Federal Trade Commission requires by law that all franchisors provide the FDD to potential franchisees (you) at least two weeks before you sign the franchise agreement. Additionally, you can request an FDD from the franchisor as soon as your application has been received by the franchisor and they have agreed to consider it. You may want to consider requesting the franchisor s FDD early so you have more time to review it. By reviewing the franchisor s FDD, you will understand the form agreements and will just need to review the agreements specific to your situation once you receive them. The FDD is made up of 23 sections, called items. Below we discuss some, but not all, of the information disclosed in each Item. ITEM 1: FRANCHISE S BACKGROUND Item 1 outlines the franchise s background, including: Length of time the franchisor has been in business Any parent, predecessors, and affiliates The franchisor s or its affiliate s prior experience in franchising Potential competitors Special laws for the industry ITEM 2: BUSINESS BACKGROUND Item 2 explains who the leaders are for the franchisor and what their experience is. ITEM 3: LITIGATION HISTORY Item 3 describes certain types of legal actions the franchisor, its affiliates, parents, and predecessors and any of the leaders disclosed in item 2 have been involved in. This may include disclosure of pending or concluded civil between the franchisor and other franchisees or administrative actions against the franchisor or its affiliates. 3
ITEM 7: INITIAL FRANCHISEE INVESTMENT Item 7 estimates the franchisee s initial expenses to open a store and an estimate of the costs to operate the store for the first three months after opening. This section can give a reasonable idea of how much money you will need while your franchise is just getting started. ITEM 4: BANKRUPTCY Item 4 lists all of the franchisor s executives that have a history of bankruptcy. In addition, this section also discloses whether or not the franchisor itself or any of its parents or affiliates have filed for bankruptcy. ITEM 5: INITIAL FRANCHISE COSTS Item 5 outlines the initial fees paid to the franchisor or its affiliates in connection with opening a store. These costs include: Deposits and fees Cost of initial inventory, signs, and equipment ITEM 6: OTHER FEES AND EXPENSES Item 6 lists any other fees and costs paid to the franchisor or its affiliate for its own benefit, or, fees and costs which are collected by the franchisor on behalf of third-parties. These fees include ongoing costs like advertising and royalty fees. In addition, the cost of additional training for new employees is listed in this section. ITEM 8: RESTRICTIONS Item 8 describes the suppliers that you can buy from and any restrictions regarding the sources of the franchise s products and services. Franchisors need to ensure that all products and services meet their franchise s standards, which is why there are restrictions on which you can and cannot buy your products from. Item 8 also discloses the revenues a franchisor and/or its affiliates received in the previous fiscal year from franchisee purchases of products or services and if the franchisor or any of its affiliates received any rebates from third parties based on franchisee purchases. ITEM 9: OBLIGATIONS OF THE FRANCHISEE This section lists many of your contractual obligations as the franchisee and it contains cross-references to the items of the FDD and sections of the franchise agreement where all of these obligations are addressed in further detail. ITEM 10: FINANCING Item 10 outlines any direct or indirect financing programs that are available to franchisees. If needed, you might be able to borrow money from your franchisor or an associate lender to help start your franchise. These loans work the same way a loan from the bank works. 4
ITEM 11: OBLIGATIONS OF THE FRANCHISOR Just as you have obligations to the franchisor; the franchisor has obligations to you as the franchisee. Item 11 lists many of the franchisor s obligations prior to the opening of and during the operation of the store. The obligations described in Item 11 include pre-opening assistance, advertising, and training. Item 11 also provides details concerning the franchisor s operations manual as well as the computer system you are required to purchase. ITEM 12: TERRITORY Item 12 outlines any territorial protections you may receive. For example, this section explains how far away your franchise has to be from existing franchisees. It also contains a summary of the franchisor s rights to sell products through channel other than a store and disclosures other businesses operated by the franchisor or its affiliates that sell the same or similar products. ITEM 13: TRADEMARKS Item 13 provides information regarding the principal trademarks that you will use in the operation of the store. ITEM 14: PATENTS, COPYRIGHTS, AND PROPRIETARY INFORMATION Item 14 lists the key patents, copyrights, and proprietary information that you will use in the operation of the store. ITEM 15: FRANCHISEE S OBLIGATION TO PARTICIPATE IN THE FRANCHISE S OPERATION Item 15 explains how involved you need to be in the daily operations of your franchise. Most franchisors want the owner of the franchise to be extremely involved in the running of the franchise. Franchisors want to know that the owner is invested in the business and knows exactly what is going on at its franchise location. 5
ITEM 16: RESTRICTIONS ON GOODS AND SERVICES In addition to restricting which vendors you can use, the franchisor can also restrict what goods and services you can provide. Item 16 lists what goods and services you are allowed to provide and which are prohibited. For example, if you own a Pretzelmaker franchise, you are only allowed to sell what s on the Pretzelmaker menu. If your sister owns a bakery, you can t sell her breads at your franchise location. ITEM 17: RENEWAL OF FRANCHISE AGREEMENT AND DISPUTE RESOLUTION ITEM 17 explains the relationship of the franchisor to the franchisee. This section also explains the terms of renewing, terminating, repurchasing, modifying, and transferring the franchise agreement. Finally, this section explains how any disputes between the franchisor and franchisee will be resolved including disclosure regarding the choice of forum and choice of law contained in the franchise and/or other agreement(s). ITEM 18: PUBLIC FIGURES Item 18 lists any public figures who are associated with the franchise and the public figure s level of involvement with the franchise. ITEM 19: FINANCIAL PERFORMANCE REPRESENTATIONS Franchisors aren t required to provide information on how its own stores or other franchisees perform, financially. However, if they choose to provide this information, they also have to provide a reasonable explanation for how they generated the numbers that support their claims. That way you have a context for the claims they are making. If a franchisor chooses to provide financial performance information it must include it in Item 19. franchisor, terminated or have otherwise closed over the past 3 years. This item will also include contact information for each franchisee. You should contact franchisees to learn about their experiences as system franchisees. This section is especially important if you are buying a store directly from the franchisor. If you are buying a previously owned franchise from the franchisor, the franchisor is required to give you a list of all of the previous owners of that particular franchise for the past 5 years. ITEM 21: FINANCIAL STATEMENTS Item 21 is the most difficult section of the FDD to understand. You may want to consult an accountant to help you understand this section. It provides audited financial statements for the past three years. ITEM 22: CONTRACTS Item 22 lists all of the contracts you will be required to sign. ITEM 23: ACKNOWLEDGEMENT OF RECEIPT Item 23 is your acknowledgement that you have received the FDD and that you have read and understood everything contained in it. ITEM 20: OUTLETS AND FRANCHISEE INFORMATION Item 20 lists all of the company owned and franchised outlets for the past three years. It discloses all outlets that opened, been transferred, reacquired by the 6
Whew, you made it to the end! Congratulations! You can now go through your Franchise Disclosure Document and understand where to find certain information. Remember, if you still have questions; feel free to talk to your pretzel franchise point person who can answer any questions that you have. At Pretzelmaker, we want you and your franchise to succeed. We are always here to help you with whatever you need. Welcome to the Pretzelmaker team! All materials have been prepared for general information purposes only to permit you to learn more about the FDD. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. The information presented is a summary of the disclosures required by the Federal Trade Commission. The terms of your contract will govern your franchise relationship. Don t rely on the disclosure document alone to understand your contract. Read your entire contract carefully. Show your contract and the FDD to an advisor, like a lawyer or an accountant. This information is not intended as an offer to sell, or the solicitation of an offer to buy, a franchise. It is for information purposes only. Currently, the following states regulate the offer and sale of franchises: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. If you are a resident of or want to locate a franchise in one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your state. Franchise offerings are made by the Franchise Disclosure Document only. For New York: This advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law. For Minnesota: MN File No. F-6173 SOURCES: http://www.entrepreneur.com/article/222438 -https://www.ftc.gov/tips-advice/business-center/guidance/buying-franchise-cons umer-guide#2 http://thompsonhall.com/public-figures-franchise-disclosure-document-item-18/ 1346 Oakbrook Drive, Suite 170, Norcross, GA 30093 770.514.4500 800.524.6444 franchiseinfo@gfgmanagement.com