FRANCHISE 101

Franchise Disclosure Document (FDD)

The Federal Trade Commission (FTC) requires franchise and business opportunity sellers to provide to prospective buyers with a Franchise Disclosure Document. State regulations may require additional requirements so check with your local state on these special requirements. The purpose of the FDD is to provide information to the public about the business and the franchise company as part of protection and due diligence.

There are 23 items of information that must be included in the FDD that include the following:

Cover Page
The Franchisor, Its Predecessors and Affiliates
Business Experience
Franchisee’s Obligations
Financing
Franchisor’s Obligations
Territory
Trademarks
Patents, Copyrights, and Proprietary Information
Obligation to Participate in the Actual Operation of the Franchised Business
Restrictions on What the Franchisee May Sell
Renewal, Termination, Transfer, and Dispute Resolution
Public Figures
Earnings Claims
List of Franchise Outlets
Financial Statements
Litigation
Bankruptcy
Initial Franchise Fee
Other Fees
Initial Investment
Restrictions on Sources of Products
Contracts
Receipt

Discovery Day

A discovery day is a personal face to face meeting between the franchisor and the prospective buyer. The franchisor often will invite the prospective buyer to tour the corporate offices, training facilities, and local stores to be able to further explain the business and all the aspects of the franchise system. For the candidate, it is an excellent opportunity to ask questions and meet face to face the training and support individuals that will assist them throughout the life of their business. Discovery days are a good indicator of the franchisee’s level of interest in purchasing the business. In most cases, it involves travel.

Non-Disclosure Agreement (NDA)

This is also called a confidential disclosure agreement or confidentiality agreement that outlines the confidential nature of information, materials, knowledge relating to a specific topic or business that parties will share with each other but not with anyone else. The executed NDA creates a confidentially binding relationship between the parties to protect the non-public information, which may be proprietary.

Franchise/Franchising

The action of duplicating a successful and proven business model by means of selling that business model to a respective buyer and leveraging the success of the predecessors to the buyer. The franchisee has a vested interest in the success of the business, thus they are involved as a business owner rather than an employee.

Business Opportunity

In most cases a business opportunity is the same as a franchise, however most state regulations view a business opportunity as synonymous with a franchise. A disclosure document must be provided in most cases for a business opportunity. By definition, a business opportunity involves the sale of a product or service to enable the purchaser to profit and operate as a business.

Business Broker

An intermediate person or organization who facilitates the transaction of buying and selling businesses or franchises between respective parties. They can be instrumental in the process of finding, sourcing, and valuing businesses and franchise systems for sale.