In my over three decades of experience as a franchise consultant, I am often asked “What are the rules of franchise disclosure when you franchise your business?”
All Franchisors must create a document called the Franchise Disclosure Document (FDD) when you franchise your business. This document must contain certain required information regarding the Franchisor company.
As I discussed in my previous blog, the FTC Rule on Franchising is the governing law requiring disclosure to franchise prospects. This Rule requires you to prepare the FDD in the prescribed manner when you franchise your business, and you must include 23 specific topics of information. The disclosure process was implemented in an effort to guarantee that the prospective Franchise Owner receives all the information necessary to make a fully informed decision about your franchise program when you franchise your business.
What information must you include in your FDD when you franchise your business? Some of the required disclosures include biographies of the Franchisor’s officers, directors and managers, (as well as any bankruptcies or certain litigation filed against these representatives), history of the franchise company and any parent or related companies, required purchases from the Franchisor or a related company, the amount of the Initial Franchise Fee and royalty or service fees, training programs, goals of the Franchisor and other information.
As you can see, a substantial portion of the information to be included in the FDD when you franchise your business is very clearly described in the FTC Rule on Franchising. There is no doubt whether to include it in the FDD. However, often when I am working on a particular franchise program, a question may arise about whether to disclose certain information in the FDD.
These decisions can be judgement calls when you franchise your business. Each determination must be handled on a case-by-case basis, depending upon the specific circumstances when you franchise your business. If faced with a decision whether to include certain information in the current situation, I use the standard of “reasonable” to guide me.
Would a reasonable person find this information relevant when choosing whether to invest in this franchise?
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