What Is an FDD? A Plain-English Guide to the Franchise Disclosure Document

What Is an FDD? A Plain-English Guide to the Franchise Disclosure Document

If you are thinking about buying a franchise, the most important document you will read is the Franchise Disclosure Document, or FDD. It is required by the Federal Trade Commission's Franchise Rule, and it is designed to give you the facts you need to make an informed decision before you sign anything or pay any money.

What is a Franchise Disclosure Document?

An FDD is a standardized legal disclosure that franchisors in the United States must give to prospective franchisees. Every FDD follows the same structure of 23 sections, called Items, so you can compare one franchise opportunity with another. It also includes the franchisor's audited financial statements and copies of the agreements you would sign.

When should you receive the FDD?

Under the FTC Franchise Rule, a franchisor must give you the FDD at least 14 calendar days before you sign a binding agreement or pay any money. Some states have additional registration and disclosure requirements. Read more in our guide to the FTC 14-day rule.

The FDD Items buyers should read most closely

  • Item 1, The Franchisor: who the company is, its history and the business you would operate.
  • Item 2, Business Experience: the background of the franchisor's directors and officers.
  • Item 3, Litigation: certain lawsuits and government actions involving the franchisor and its management.
  • Item 4, Bankruptcy: relevant bankruptcy history.
  • Items 5 and 6, Fees: the initial franchise fee plus ongoing royalties, marketing fees and other charges.
  • Item 7, Estimated Initial Investment: a range of what it may cost to open, from build-out and equipment to working capital.
  • Item 11, Franchisor's Assistance: training, site selection, opening support and ongoing help.
  • Item 12, Territory: whether you receive any protected area.
  • Item 17, Renewal, Termination and Transfer: what happens when the agreement ends or if you want to sell.
  • Item 19, Financial Performance Representations: any sales or earnings information the franchisor chooses to share. If it is not in Item 19, the franchisor generally should not make earnings claims to you.
  • Item 20, Outlets and Franchisee Information: how many units opened, closed or transferred, plus contact information for current and former franchisees.
  • Item 21, Financial Statements: the franchisor's audited financials.
  • Item 22, Contracts: the franchise agreement and related documents.
  • Item 23, Receipts: the page you sign to confirm the date you received the FDD.

How to read an FDD like a pro

  • Call franchisees from Item 20, including former owners. Ask about real costs, support and the time it took to break even.
  • Compare Item 7 with your own budget and leave room for working capital.
  • Read Item 3 carefully and ask the franchisor to explain anything you do not understand.
  • Hire a franchise attorney and an accountant to review the FDD and the agreement before you sign.
  • Watch for any pressure to sign quickly or to pay before the 14-day window has passed.

Frequently asked questions

Is an FDD the same as a franchise agreement?
No. The FDD is a disclosure document. The franchise agreement is the contract, and a copy is included in the FDD.

Does an FDD mean the government approved the franchise?
No. The FTC does not review or approve FDDs. Some states review them as part of registration, but registration is not an endorsement.

Where can I learn more?
The FTC publishes A Consumer's Guide to Buying a Franchise.

Request the Qargo Coffee FDD

Qargo Coffee encourages every prospective franchise partner to read the FDD carefully, speak with current franchisees and get independent professional advice. Learn about owning a Qargo Coffee and request our Franchise Disclosure Document.

This article is general information, not legal advice. Consult a qualified franchise attorney about your situation.