Owning and operating a franchise is an exciting opportunity. But it can involve quite a bit of paperwork and technicalities you might not have been prepared for. As a franchisee or franchisor, it’s helpful to have an audit firm on your side that can review all financial aspects of your business, especially the fundamentals of an FDD franchise disclosure document (FDD).
Let’s examine this document more closely and determine why it’s essential to your franchise business.
What is an FDD Franchise Disclosure Document?
An FDD franchise disclosure document thoroughly explains the franchise’s operations in detail. It outlines everything you need to know about the franchise, from a description of the franchisor’s management experience to contracts and financial statements.
When you enter talks to purchase or sell a franchise, an FDD financial disclosure document must be prepared. Typically, the FDD franchise disclosure document must be available fourteen (14) calendar days before any involved party signs a binding contract. This timeframe should give everyone involved plenty of time to review the document, weigh the pros and cons, and make the best, most informed investment decision.
Core Components of an FDD
The franchise disclosure document contains twenty-three core items, each containing critical information you need to understand about the opportunity presented to you. According to Rule 16 CFR Part 436 and 437, these items must be included.
The core components must include and thoroughly explain each of these items. Here is a general overview of them, following the order in which they appear in an FDD financial disclosure document:
- Franchisor, parent company, or predecessor affiliates
- Business experience
- Litigation
- Bankruptcy
- Initial fees
- Other fees
- Restrictions on the sources of products and services
- Franchisee’s obligations
- Financing
- Franchisor’s assistance, training, advertising, and computer systems
- Territory
- Trademarks
- Patent, copyrights, and proprietary information
- Obligation to participate in the operation of the franchise business
- Restrictions on which products can be sold
- Removal, termination, transfer, and dispute resolutions
- Public figures
- Financial performance representations
- Outlet and franchise information
- Audited financial statements
- Contracts
- Receipts
Why is an FDD Important?
Think of an FDD as a deep dive into the franchise opportunity without entering a binding agreement. An FDD financial disclosure document illuminates everything relating to the franchise so you can clearly evaluate the business as a whole.
This is important for several reasons.
If you are given the opportunity to enter into various franchise agreements, an FDD can help you make the best, most informed decision about which opportunities are best for you and your investments. Also, taking the time to thoroughly read, understand, and analyze each item can help you weigh and consider potential risks that might come from the agreement.
An FDD can also help you understand the unique relationship between a franchisor and the franchisee. By reviewing the FFD financial disclosure document before signing a contract to purchase one, you shouldn’t run into any surprise obligations relating to your franchise later on.
Prepare Your FDD Franchise Disclosure Document
The FDD requires a complete and accurate franchise financial statement. While each item of an FDD is essential, the financial statement likely requires a review or audit by a franchise auditor. It’s helpful to partner with an audit team experienced in franchising opportunities who can prepare and complete your audit. With their knowledge and experience, you can be sure your reviewed financial statements accurately represent your business.
At Assurance Dimensions, we’re a leading provider of franchise accounting, audit, and assurance services. With over 75 years of industry experience, our team of dedicated accounting professionals is ready to help you with your assurance needs in a convenient way, whether in person or over our secure cloud server. Contact us today for a free audit quote.