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Franchise Disclosure Document (FDD)

The document a franchisor must give a prospective franchisee before any contract is signed or money changes hands - what the federal rule requires it to contain, what it does not promise, and the state laws that add registration and relationship rights.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

Federal law requires a franchisor to give every prospective franchisee a disclosure document, in a prescribed format of twenty-three numbered items, a set number of days before the franchisee signs any binding agreement or pays anything. The items cover the franchisor and its officers, litigation and bankruptcy history, every fee the franchisee will pay, the estimated initial investment, restrictions on suppliers and products, the franchisee's obligations, territory, trademarks, renewal and termination terms, a list of current and former franchisees to contact, audited financial statements, and copies of every contract the franchisee will sign. One item is reserved for financial performance representations; a franchisor that makes any claim about what franchisees earn must put it there with its basis, and a claim made anywhere else is unlawful.

The rule is a disclosure rule, not a fairness rule. It does not require the terms to be reasonable, it does not vet the franchisor's business, and it gives the franchisee no federal right to sue for a violation - enforcement is by the Federal Trade Commission. What it does is put the franchisor's claims and the contract in one place, in a form that can be compared across systems and shown to an adviser, before the franchisee is committed.

A number of states go further. Registration states require the disclosure document to be filed and approved before the franchise can be offered there, and give franchisees a private claim for violations. Relationship states restrict termination and non-renewal without good cause, protect the franchisee's right to sell the business, and limit some contract terms. Whether a state's laws apply generally turns on where the franchisee or the business is located, not on where the franchisor is.

Where this comes from

The Federal Trade Commission's Franchise Rule, 16 C.F.R. Part 436, issued under the FTC Act, 15 U.S.C. § 45, sets the disclosure obligation (§ 436.2), the items of the disclosure document (§ 436.5) and the prohibition on financial performance representations outside Item 19 (§ 436.9); a related Business Opportunity Rule is at 16 C.F.R. Part 437. Representative state franchise laws are the California Franchise Investment Law, Corporations Code § 31000 and following, the New York Franchise Sales Act, General Business Law § 680 and following, and the Illinois Franchise Disclosure Act, 815 ILCS 705; each state's act states its own registration, disclosure and relationship provisions.

When people hire a lawyer for this

A prospective franchisee should have the disclosure document and the franchise agreement reviewed by a lawyer who reads them regularly, and should call the current and former franchisees the document lists, before paying a deposit. Anyone told a number about likely earnings should ask where in the document it appears; if it does not, that is the reason to see a lawyer rather than sign. A franchisee facing termination or non-renewal should ask whether the state has a relationship law before accepting the franchisor's position.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

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