Franchise Disclosure Document (FDD): What the 23 Items Disclose and How to Read Them
Short answer: A Franchise Disclosure Document (FDD) is the pre-sale disclosure a franchisor must give a prospective franchisee under the FTC Franchise Rule. It has 23 numbered Items covering the franchisor, fees, investment, obligations, territory, litigation, outlets and audited financials, and must arrive at least 14 calendar days before signing or paying any money.
The Franchise Disclosure Document (FDD) is a standardized legal document that a franchisor gives a prospective franchisee before any sale. The FTC Franchise Rule (16 CFR Part 436) sets its format: a cover page, a table of contents, 23 numbered Items and exhibits such as the franchise agreement and financial statements.
The FDD serves two readers. For a buyer, it is the main evidence for evaluating a franchise. For a business owner who plans to franchise, it is the central legal deliverable of franchise development.
What is the 14-day rule for the FDD?
The 14-day rule requires that a prospective franchisee receive the FDD at least 14 calendar days before signing a binding agreement or paying any money to the franchisor or an affiliate. The FTC’s Compliance Guide states that the 14 days begin the day after delivery, so the buyer has 14 full days to review.
A buyer can also request the FDD earlier. The FTC’s Consumer’s Guide explains that a prospect has the right to a copy once the franchisor has received the application and agreed to consider it.
What are the 23 Items of the FDD?
The 23 Items of the FDD, in the order set by the FTC Franchise Rule, are:
| Item | Title | What it tells the reader |
|---|---|---|
| 1 | The Franchisor and any Parents, Predecessors, and Affiliates | Who is selling and the business history |
| 2 | Business Experience | Background of directors and officers |
| 3 | Litigation | Relevant lawsuits involving the franchisor |
| 4 | Bankruptcy | Bankruptcy history of the franchisor and management |
| 5 | Initial Fees | The initial franchise fee and how it is paid |
| 6 | Other Fees | Royalties, marketing fund and other recurring fees |
| 7 | Estimated Initial Investment | Total cost range to open and operate early on |
| 8 | Restrictions on Sources of Products and Services | Required suppliers and purchases |
| 9 | Franchisee’s Obligations | Cross-reference of duties in the agreement |
| 10 | Financing | Financing offered by the franchisor, if any |
| 11 | Franchisor’s Assistance, Advertising, Computer Systems, and Training | Support before and after opening |
| 12 | Territory | Territorial rights and protection, if any |
| 13 | Trademarks | Status of the marks the franchisee will use |
| 14 | Patents, Copyrights, and Proprietary Information | Other intellectual property |
| 15 | Obligation to Participate in the Actual Operation of the Franchise Business | Whether the owner must work in the business |
| 16 | Restrictions on What the Franchisee May Sell | Product and service limits |
| 17 | Renewal, Termination, Transfer, and Dispute Resolution | How the relationship continues or ends |
| 18 | Public Figures | Celebrity involvement and compensation |
| 19 | Financial Performance Representations | Optional earnings data |
| 20 | Outlets and Franchisee Information | Unit counts, openings, closures and franchisee contacts |
| 21 | Financial Statements | The franchisor’s three most recent audited annual financial statements |
| 22 | Contracts | Copies of the agreements the buyer will sign |
| 23 | Receipts | Proof of the date the FDD was delivered |
Which FDD Items show what a franchise costs?
FDD Items 5, 6 and 7 show what a franchise costs. The FTC’s Consumer’s Guide groups these three Items as initial and ongoing costs. Item 5 lists the initial franchise fee, Item 6 lists recurring fees such as royalties and advertising contributions, and Item 7 estimates the total initial investment as a range by expense category.
Item 7 deserves the most attention, because the initial franchise fee is only one line in it. The guide to franchise costs explains how to read each cost line.
What is Item 19 and why is it optional?
Item 19 is the section where a franchisor may disclose financial performance representations, such as average sales or profit of existing units. The FTC Franchise Rule does not require it, yet the FTC’s Consumer’s Guide notes that most franchisors provide some form of sales or earnings information.
A franchisor that gives no Item 19 cannot make earnings claims elsewhere in the sales process. Buyers treat any earnings claim made outside Item 19 as a warning sign.
How should a franchise buyer read an FDD?
A franchise buyer reads an FDD by checking four groups of Items against each other: cost (Items 5, 6, 7), obligations and restrictions (Items 8, 9, 12, 16, 17), system health (Items 3, 4, 20, 21) and performance (Item 19). Contradictions between these groups are the questions to bring to the franchisor and to a franchise attorney.
Item 20 is the most practical starting point. It lists current and former franchisees with contact information, and calls to those owners are the core of franchise due diligence, as described in the franchise selection process.
How does a business owner create an FDD?
A business owner creates an FDD with a franchise attorney after the franchise model is designed. The attorney drafts the 23 Items and the franchise agreement, an independent CPA audits the financial statements for Item 21, and the franchisor supplies the operational facts behind Items 8, 11, 12 and 20.
The FDD can only describe decisions that already exist: fees, territory rules, training and supplier requirements. That is why fee design comes before drafting in the steps to franchise a business.
Frequently asked questions
When must a franchisor give the FDD?
Under the FTC Franchise Rule, the prospective franchisee must receive the FDD at least 14 calendar days before signing a binding agreement or paying any money to the franchisor or an affiliate.
Is Item 19 required in an FDD?
No. Item 19, financial performance representations, is optional under the FTC Franchise Rule. If a franchisor makes earnings claims, they must appear in Item 19 with a reasonable basis.
What was the FDD called before 2007?
Before the amended FTC Franchise Rule took effect on July 1, 2007, the disclosure document was commonly known as the Uniform Franchise Offering Circular (UFOC).
Which FDD Item shows the total cost to open a franchise?
Item 7, Estimated Initial Investment, shows the total cost to open, in a low-to-high range by expense category. Items 5 and 6 list the initial fee and ongoing fees.
Related guides
Sources
This guide is general information, not legal, tax or investment advice. Franchise laws change and apply differently to each business. Review any franchise decision with a franchise attorney and an accountant.