Have You Been Given a Current FDD? Why does it matter?
To sell a franchise in the United States, the franchisor must give all prospective buyers a Franchise Disclosure Document (FDD) that is required by the Federal Trade Commission. The FDD is not filed or reviewed by the FTC, but some states require that it be filed, reviewed and approved annually before a franchise can be offered to their residents.
What is an FDD? It is a form of prospectus that contains information that federal and state regulators have determined is important to be provided to anyone before they buy a franchise. It also contains a summary of certain typical contract provisions in the franchise agreement. Keep in mind that not all important provisions are summarized in the franchise agreement. The FDD also is required to contain a sample copy of the franchise agreement and any other contracts are forms you might be required to sign.
The FDD itself is not the binding contract!
All states and the FTC require that the FDD be updated annually, and in most jurisdictions that means all information in the FDD must be current as of the close of the most recent fiscal year end, typically December 31 of each year.
This means that many FDDs provided to prospective franchise buyers in the first 3 to 4 months of the year are about to expire because the information it contains is a full calendar year old.
Why does it take so long? Some franchisors are slow to get around to assembling the information needed to update the FDD, but usually the holdup is caused by the requirement to include audited financial statements for the most recent fiscal year. The larger the franchisor, the more franchised and company units in the system, the longer the auditors will likely take to complete the audited statements. There can be many reasons for the delay, but the practical effect is that most FDD’s cannot be completed or state franchise registrations renewed until the franchisor’s audited statements are available.
Before You Buy a Franchise
If you are considering buying a franchise, and the updated FDD is not available, then you should ask for the updated FDD information for Item 20, Outlets and Franchisee Information. This also included an updated list of franchisees currently operating, as well as former franchisees who have been terminated or have otherwise left the system. If the franchisor is providing financial performance representations in Item 19, then be careful in evaluating it and ask the franchisor if the information has been updated.
It is also important to ask the franchisor if there are any material changes to the information in the FDD they have provided you. Ask when the final updated FDD will be available.
Even though the burden is on the franchisor to provide you with certain mandated information, keep in mind that it is your money your future and your future business. Do your homework, be sure you have current information, talk to other franchisees in the system and ask questions. Be patient it may be worth it to wait for the updated version of the FDD.
