Similar to other large purchases, becoming a franchisee requires entering into many complex legal documents. While the agreements and disclosures are often lengthy, they are important legal documents that should be evaluated.
Two of the most important documents are the Franchise Disclosure Document (FDD) and the franchise agreement. It is essential to know the purpose of both documents and how they support your franchise investment.
Here’s what you should know about the differences between an FDD and a franchise agreement.
Franchise Disclosure Document (FDD)
The FDD is a document regulated by the Federal Trade Commission (FTC). The FTC gives a list of 23 items that the disclosure document must include, such as:
- Estimated initial investment
- Franchisee’s obligations
- Territory
- Financial statements
These disclosures are required to be provided to prospective franchisees so they have an overview of the risks and benefits of investing in the franchise. Unfortunately, these documents are often hundreds of pages long, and offer an overwhelming amount of information.
Although the FDD is not a legally binding agreement, it is critical to making a well-informed decision as a future franchisee. An experienced franchise attorney can help you review the FDD and know what to look for as you consider your investment.
Franchise Agreement
Your franchise agreement is a legally binding document and the foundation of your journey as a franchisee. This contract includes the terms of your agreement with the franchisor and the mutual obligations you have to each other.
In most cases, franchise agreements are not negotiable. However, it is important to talk to a franchise attorney and have them review the contract so that they can advise you of any potential complications with the contract.
Franchise agreements are not like other types of business contracts and often contain lengthy commitments that are difficult, if not impossible, to escape. You should have a firm understanding of the risks that come with becoming a franchisee.
