it is essential to understand the obligations and rights within your franchise

agreement. This will ensure that the terms of the agreement are implemented
in your day to day business operations.

While the FDD may be intimidating and complex, remember that its whole purpose is to give
you the information you need to make the right franchising decision.

f the information regarding the franchisor’s business is very vague, it could

indicate that the franchisor struggles to understand what they’re offering, or that
the opportunity wouldn’t be appealing if the details were fully disclosed.
Make sure you trust and can work well with them

disclosure document

he FDD’s primary role is to provide prospective franchisees with the

information required by franchise law and includes information on the
franchisor, the company’s leadership team, bankruptcy and litigation history,
initial and ongoing fees, the initial investment a franchisee needs to make to
open their business, the fees that will be charged, and detailed information
about the intended franchise relationship. All current and past franchisees'
contact information is also provided in the FDD.

- the purpose of the FDD is to provide prospective franchisees with

information about the franchisor, the franchise system and the
agreements they will need to sign so that they can make an informed
decision. In addition to the disclosure part of the document, the FDD
includes the actual franchise agreement as well as other agreements
the franchisee will be required to sign, along with the franchisor’s
financial statements. The FDD is designed to give you some of the
information you need in order to make an informed decision about
investing in a particular franchise. By law, a franchisor cannot sell a
franchise until the franchisor has presented the prospective franchisee
with a Disclosure Document. In fact, 14 states require franchisors to
register their FDDs with the state or to notify them that they will offer
franchises before they begin to conduct any franchising activity in the
state. The FDD includes information about: 
 • The franchisor  and the company ( how long the company has been in
business, Licenses or permits needed to run the business)

      

• The company’s key staff             

• Management’s experience in franchise management             

 • Franchisor’s bankruptcy and litigation history  ( If a history of bankruptcy

exists, consider the risks ….Keep in mind how each party’s bankruptcy could
affect your investment in the franchise and your relationship with the franchisor.

)           

• Initial and ongoing fees involved in opening and running the

franchise             

• Required investment and purchases                  

• Territory rights                     

• Responsibilities of the franchisor and franchisee                    

• Other franchisees in the system with contact information

Receipt of the FDD is governed by the “14-day rule.” This is a cooling-off

period in which franchisors must give prospective franchisees 14 days to think
about their decision before they sign the franchise agreement.
agreement
The Franchise Agreement also describes the support that the franchisee will
be provided by the franchisor. Always remember that the relationship between
franchisor and franchisee is contractual - what you have in your written
documents is essential. 

The Franchise Agreement

The franchise agreement is more specific than the FDD about the terms of the relationship
between the franchisor and franchisee. The franchise agreement includes information about:

• The franchise system, such as use of trademarks and products ( If the franchisor does not
have the name or logo properly registered, this is a reason to “just say no” to the
opportunity.) all franchisors will clearly outline the complete and proper registration of
their logos and trade names. This is one of the first things a franchisor does when
setting up their system to franchise.   

• Territory       

• Rights and obligations of the parties: standards, procedures     

• Term (duration) of the franchise

• Payments made by the franchisee to the franchisor                   

• Termination and/or the right to transfer the franchise

• Training, assistance, and advertising

The franchise agreement is the legal, written document that governs the relationship and
specifies the terms of the franchise purchase. A prospective franchisee should closely review the
franchise agreement and consult with a professional advisor, like an attorney or an accountant,
before making a final decision. 
Prospectus
This is often the first document a prospective franchisee will come across. It usually
forms part of the franchisor’s marketing materials and is often seen around franchise
exhibitions or provided by the franchisor during the early stages of enquiry.

The prospectus contains a general overview of the franchise operation and may also
contain financial information of pilot franchises or trading franchises and possibly
financial projections.

Confidentiality agreement or intent to proceed/ deposit

agreement
A prospective franchisee may be asked to sign one or both of these documents in
order to proceed with their enquiry. Franchisors have usually spent a lot of time and
money developing their unique offering and it’s important the information they share
with prospective franchisees is kept confidential.

An intent to proceed agreement may be used when a prospective franchisee wishes to

reserve a territory and the franchisor may also look to take a deposit at that stage. If
the franchisee does not proceed, the deposit - if any - should be refundable, less any
direct third party expenses incurred by the franchisor.
Information memorandum /disclosure document
Although not required in any particular form, franchisors often have a bank of
information relating to their business and the franchise offering. It is likely this
information will only be provided after a prospective franchisee has signed the
confidentiality or intent to proceed agreement.

It’s also likely this information will contain details of financial performance or
projections. Prospective franchisees are advised to discuss any such projections with
the franchisor in order to gain a clear understanding of where the figures originated.

Franchise agreement
This document should be uniform for all franchisees in a franchisor’s network. Often,
franchisors will say their franchise agreement is nonnegotiable. This is so they are
treating all franchisees fairly and on similar terms.

If there are any variations to the franchise agreement to address specific circumstances
of a franchisee, these may be dealt with in the schedules to the franchise agreement or
in an appropriate side letter, which is signed at the same time as the franchise
agreement and forms part of it.

The franchise agreement should clearly set out details of the parties, business system,
brand and use of the brand, along with other key terms and features. The franchisee’s
obligations clause will be substantial and typically includes initial and ongoing
training, staffing, financing and accounts, payment of fees, minimum performance,
attendance to business, use of and compliance with the business system and insurance.

If franchisors operate national account customers, where franchisees from different

territories would be required to service them, that should also be detailed in the
franchise agreement. In addition, there will be provisions regarding the franchisee’s
rights to sell their business.

Trademark licence
This may be a separate document or dealt with in the body of the franchise agreement.
Its purpose is to specifically licence to the franchisee the right to use the franchisor’s
trademarks.

One of the most important aspects of franchising is the franchisor’s name and brand.
Often, franchisors will protect their brand - logo or trading name - via a registered
trademark and it’s an important part of the due diligence process to check this.

Operations manual
Each franchise should have a manual that details the operational aspects of running
the business. Franchisees are typically provided with a copy of - or access to - the
manual after completion of their training and once the franchise agreement has been
signed.

Manuals may be hard copy or electronic and sometimes accessible via a franchisor’s
computer system or web portal. Franchisors may allow prospective franchisees to
view the manual under appropriate conditions of confidentiality before signing the
franchise agreement, but would not normally allow long-term access or copies to be
made.

https://www.what-franchise.com/business-advice/franchising-your-first-steps/6-legal-documents-you-
need-to-consider

https://www.businessbroker.net/blog/just-for-fun/understanding-the-2-main-legal-documents-of-
franchising

https://franchise.groutsmith.com/blog/franchise-disclosure-document-and-why-is-it-important/