Franchise Disclosure Document and Franchise Agreement

Franchising can be a good endeavor for entrepreneurs who want to invest money in an existing business model and gain an immediate competitive edge.

The impact of franchising can be felt in several business segments in the US economy. However, nowadays the franchising industry’s largest segment is the fast-food restaurant business, including some of the most recognizable companies worldwide, such as Dunkin Donuts, McDonald’s, and Starbucks.

Opening a franchise in Florida requires a substantial amount of capital and knowledge, especially regarding the legal aspects of this type of business.

In this article, you will discover the difference between franchise disclosure documents and franchise agreements in Florida.

How the Franchising Business Work – Understanding the Process

In the franchising industry, the business owner (known as franchisor) licenses various entrepreneurs (known as franchisees) to operate companies based on a pre-designed business model.

The franchisee must pay an initial fee to the franchisor to enter the business. In return, the franchisee is granted the franchise’s authorization to use their trademark, and the right to utilize the franchisor’s business system to sell their goods/services.

Typically, the franchisor must provide support to all franchisees, including initial and ongoing employee training.

At first, joining the franchising industry may be a bit of a daunting task. Indeed, there are several legal requirements involved in the process, which include a significant amount of paperwork and complex language.

In this sense, prospective franchisees may get a bit confused when dealing with franchise agreements and franchise disclosure documents.

Each of these documents is crucial in the franchising process, which means understanding their purpose and terms in detail is the first step before joining any franchising system.

Franchise Disclosure Document (FDD)

A franchise disclosure document (also known by the acronym FDD) is a document that franchisors need to provide to prospective franchisees before the signing of any binding agreement.

Typically, this type of document is lengthy and detailed, including items such as the company’s history, financial data, and confidentiality restrictions.

In this sense, the Federal Trade Commission requires all franchisors to disclose 23 specific items in the document, including costs and feeds, turnover rates, and legal issues.

Plus, the same commission also requires franchisors to provide a copy of their updated FDD to franchise applicants before settling a transaction.

Consequently, any prospective franchisee can determine whether to invest in the franchise, as all the items included in the franchise disclosure agreement demonstrate actual business information.

Even though an FDD can be lengthy and full of details, potential franchisees need to understand every aspect of the document before settling a franchise agreement.

Understanding the terms in the FDD can open room for negotiation between the franchisor and a franchisee. Hence, applicants should follow a strategic approach and read the FDD in its entirety to ensure that they agree with all the terms included in the document.

In this sense, the optimal approach would be to seek guidance from an expert business attorney to oversee the process and explain all details involved.

Franchise Agreement

On the other hand, a franchise agreement is a legally binding contract between the franchisor and a franchisee. Once a franchise agreement is signed by both parties involved in the transaction, the franchising relationship is officially established.

Essentially, the purpose of franchise agreements is to ensure that all franchisees are treated equally by a franchisor. While a franchise disclosure agreement can be altered, a franchise agreement typically remains unchanged.

Various terms can be included in a franchise agreement in Florida, including:

The franchise’s location/territory
Operational guidelines
Access to intellectual property (trademark, patent, logo, signage, etc.)
Length of the contract’s duration
Franchise fee/investment
Royalties and ongoing fees
Accounting and reports
Staff training (basic and advanced)
Administrative and technical support
Advertising and marketing
Renewal rights
Termination/cancellation policies
Release policies
Insurance policies
Arbitration clause (if necessary)

For those unaware, an arbitration clause is a clause utilized in contracts that requires the involved parties to solve their disputes through an arbitration procedure. Hence, an arbitrator must review the situation before the case goes to court.

We recommend you seek guidance from a business attorney in Florida to ensure you will not expose yourself to future headaches due to confusion and misunderstanding.