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Franchise Disclosure Documents Explained

Once you've researched franchise opportunities and have identified possibilities based on your results and investment level, you'll need to make contact. At this point, you'll enter the legal side of buying a franchise.

The Federal Trade Commission regulates all franchises operating in the United States. The franchisor must give full and honest disclosures to potential franchisees about business operations, according to the FTC rules. The disclosure is now known as the Franchise Disclosure Document, but was previously called the Uniform Franchise Offering Circular.

The FTC doesn't require special federal approval of FDDs, but fourteen states require approval of a franchisor's financial disclosure document, including Wisconsin, Washington and New York. States that don't require FDD approval still mandate franchisors register with the state government business division before selling franchises.

The FDD is a vital but complex document. A standard FDD has 23 sections total and these sections give you important information about the franchise before you sign an agreement.

The disclosure covers the franchisor's business history, management structure and experience. You'll be able to find out about the franchisor's legal status as a business and any past or pending court actions affecting the franchisor.

A fee schedule, included in the FDD, lists all the fees involved in opening, running and closing the franchise. The details and terms of financial agreements the franchisor offers franchisees is also included, as well as restrictions on services or products.

The FDD's data section offers information about current operations, including how many locations have opened and closed. The provided legal asset information will disclose items such as current patent and trademark protections. The rest of the FDD details what is expected of you as a franchisee and what the franchisor is responsible for.

You should have the FDD reviewed by an experienced franchise attorney so you full understand all the information it contains. Contact the state bar association to locate franchise attorneys in the franchise state.