When I meet with a prospective franchisor and review the necessary documentation with them, I invariably walk them through the 23 items that must be contained in their Franchise Disclosure Document, commonly referred to as the FDD. This is also a process we engage in when reviewing an FDD with a prospective purchaser of units in a franchise system. That exercise and my understanding of the 23 items of disclosure is so ingrained in my thought process concerning franchising that it has not occurred to me previously to discuss the 23 items on this blog.
The requirement for 23 items is created by the Federal Trade Commission (16 CFR 436) and the actual text of the statutory requirements concerning the FDD and the 23 items can be found on the FTC website. I would not attempt to refer to that document for an understanding of the requirements unless you have limitless time and patience.
The FDD is well known enough in layperson business circles to have achieved an entry on Wikipedia, which offers a surprisingly detailed description of the 23 items. However, I have not checked the information posted there for accuracy and relying on Wikipedia for complicated legal statutory analysis is probably not a good idea.
A concise summary of the requirements associated with these items is provided on FranchiseKnowHow, a reliable and informative franchising blog, which has reviewed the FDD as a whole.
The 23 items are intended to present specific information in a uniform way to prospective franchisees. Because the format is very rigid, the information sometimes is presented in a tortured or confusing manner in order to fit within the 23 headings. Basically, what the FTC wants you to know about is the following:
-Information concerning the franchisor and the indivduals comprising the franchisor, including litigation and bankrutpcy (Items 1,2,3,4);
-Fees and payments due to franchisor and others before the business opens (Items 5,6);
-Total initial investment (Item 7);
-Required suppliers of goods and services (Item 8);
-Franchisee obligations (Item 9);
-Financing arrangements (Item 10);
-Franchisor obligations (Item 11);
-Territory (Item 12);
-Trademarks and patents (Items 13, 14);
-Restrictions on sales of goods and services (Item 16);
-Basic franchise agreement provisions (Item 17);
-Financial performance representations – optional (Item 19);
-History of openings, closings and transfers of units (Item 20);
-Financial statements (Item 21).
-List of agreements and receipt (Items 22,23).
The above information provides a good start in evaluating a franchise opportunity. However, if you are buying a franchise, you need to look beyond that and talk to existing franchisees. Find out how the business is actually run and if it can be made to be successful. If you are creating a franchise system, you will need to understand these concepts to create the business and present the concept to franchise purchasers, but you will need to know much more than that, even before you get to the point of creating an FDD. Can your business be replicated in a relatively simple and reliable way and be profitable for its operators? Only when you have a clear understanding of the answer to that question can you then proceed to the 23 items.