ELEC 103 - FRANCHISING

FRANCHISE
REQUIREME
DISCLOSURE

NT
Raven B. Mangaba – Roselyn U. Ricafort – Jasmine Rose Z. Galapon – Lance Vincent M. Villareal
THINGS TO
DISCUSS:
01 FRANCHISE DISCLOSURE REQUIREMENT
(FDR) AND ITS IMPORTANCE

FRANCHISE DISCLOSURE DOCUMENT

02 (FDD) AND ITS IMPORTANCE

23 REQUIRED DISCLOSURES IN THE

03 FRANCHISE DISCLOSURE DOCUMENT (FDD)

FRANCHISE DISCLOSURE REQUIREMENT vs.

04 FRANCHISE DISCLOSURE DOCUMENT vs.
FRANCHISE AGREEMENT
 What is a
FRANCHISE
DISCLOSURE
REQUIREMENT?
 FRANCHISE DISCLOSURE
REQUIREMENT
The rules and regulations that govern the information

1 that franchisors must disclose to prospective franchisees

before entering into a franchise agreement.
25%
A process that franchisors must follow to ensure that
2 prospective franchisees have access to the information
they need to make informed decisions about whether or

15%
not to invest in a franchise.

3
A set of standards or guidelines that define what
information franchisors must disclose to prospective
franchisees.
IMPORTANCE OF FRANCHISE DISCLOSURE
REQUIREMENT

TO PROTECT FRANCHISEES • FRAUD

• MISINTERPRETATION
• UNETHICAL PRACTICES

TO PROMOTE FAIR
DEALING
TO LEVEL THE PLAYING
FIELD
 The primary federal agency
(US) that enforces franchises
disclosure laws.

In 1978, the Federal Trade Commission (FTC) implemented the

FTC Rule.
 FRANCHISE DISCLOSURE REQUIREMENT

FRANCHISE
RULE
A rule issued by the Federal Trade Commission that prescribes that the
franchisor must disclose certain information to prospective franchisees –
The Franchise Disclosure Document.
BASIC REQUIREMENT

Franchisors must furnish potential franchisees with written disclosures

providing important information about the franchisor, the franchised
business, and the franchise relationship, and give them at least 14 days to
review it before investing/before a franchise sale can be completed.

FRANCHISE RULE
 FRANCHISE DISCLOSURE REQUIREMENT

FRANCHISE
DISCLOSURE
DOCUMENT
The FTC Rule imposes strict disclosure requirements on
franchisors in the form of a Franchise Disclosure Document
(FDD) that must be delivered to a prospective franchisee.
 FEDERAL TRADE
COMMISSION (FTC)

Franchise
Disclosure
. Document
July 2007

Uniform Franchise
Offering Circular (UFOC)
FRANCHISE DISCLOSURE DOCUMENT

A legal disclosure document that must be given to

individuals interested in buying a franchise as part of the
pre-sale due diligence process. The document contains
information essential to potential franchisees about to
make a significant investment.

A critical source of information when evaluating

whether to become a franchisee, and the Federal Trade
Commission (FTC) has made the document a legal
requirement.

A comprehensive legal document that franchisors

provide to potential franchisees to fulfill the disclosure
requirements. It is often lengthy and detailed information
that contains the information required by law.
 IMPORTANCE OF FRANCHISE DISCLOSURE
DOCUMENT
• A pre-sales disclosure document that provides franchise buyers with information
about the franchisor, franchise fees, opportunities, etc.
• The franchise disclosure document (FDD) provides a clear picture of how the
business relationship between the franchisee and franchisor will be conducted.
• The disclosure document helps potential franchisees make an informed decision
about the franchise.
• This gives you time to review and discuss the agreement with an attorney.

• Two primary reasons: To protect the buyers as a candidate and to protect the
franchisor against allegations of misleading claims.
FRANCHISE DISCLOSURE DOCUMENT

The Rule requires franchisors to provide

all potential franchisees with a disclosure
document containing 23 specific items of
information about the offered franchise,
its officers, and other franchisees.
REQUIREMENTS FOR A FRANCHISE DISCLOSURE
DOCUMENT (FDD)

23
S E CT
IO
NS
Financial Performance
Representations
 REQUIRED DISCLOSURES IN THE FRANCHISE
DISCLOSURE DOCUMENT
1. THE FRANCHISOR AND ANY PARENTS, PREDECESSORS, AND AFFILIATES:
This section establishes how long the franchisor has been operating and provides detailed
information about its identity, including its legal name, business address, and contact
information.
2. BUSINESS EXPERIENCE: Outlines the experience of the executive team running in the
franchise system.
3. LITIGATION: Covers pending actions, material actions, and prior actions against the
franchise.
4. BANKRUPTCY: Bankruptcies involving the franchise, its predecessors, and its affiliates
must be disclosed.
5. INITIAL FEES: A franchisor must disclose any fees charged to the franchisees.

23 SECTIONS
A professional crime scene and biohazard decontamination cleaning services company
 REQUIRED DISCLOSURES IN THE FRANCHISE
DISCLOSURE DOCUMENT
6. OTHER FEES: Hidden or undisclosed fees can be a source of dispute later on down the road,
so a franchisor must be careful to reveal all charges and be fully transparent.
7. ESTIMATED INITIAL INVESTMENT: The franchisee must be aware of what the low and
high range of the initial investment must be, including an estimate of their working capital.
8. RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES: Covers any required
purchases of goods and services, in addition to disclosing any ownership or financial
relationship between the franchise and required suppliers.
9. FRANCHISEE’S OBLIGATIONS: Lays out the franchisee’s obligations in a reference table.
10. FINANCING: Outlines the conditions of any financing arrangements.
11. FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND
TRAINING: Explains the pre-opening and ongoing assistance that the franchisee can expect
from the franchisor.

23 SECTIONS
 REQUIRED DISCLOSURES IN THE FRANCHISE
DISCLOSURE DOCUMENT
12.TERRITORY: While there is no obligation to give a franchisee any range or territory to do
business, this is the space to indicate any geographical restrictions a franchisor is putting on the
franchisee.
13. TRADEMARKS: Discloses the trademarks registered to the franchise.
14. PATENTS, COPYRIGHTS, AND PROPRIETARY INFORMATION: This section discloses
patents, copyrights, and other protected information not covered under the trademarks section.
15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE
BUSINESS: This makes it explicit whether the franchise can be held as an arms-length investment
or whether direct participation is expected.
16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL: Covers whether only franchise
approved goods and services can be sold.
17. RENEWAL, TERMINATION, TRANSFER, AND DISPUTE RESOLUTION: Outlines the
described processes.

23 SECTIONS
 REQUIRED DISCLOSURES IN THE FRANCHISE
DISCLOSIRE DOCUMENT
18.PUBLIC FIGURES: Covers any person whose name or physical appearance is associated with the
franchise. For example, a particular celebrity who appears in franchise commercials.
19.FINANCIAL PERFORMANCE REPRESENTATIONS: An optional space for a franchisor to
estimate a franchise’s potential performance based on reasonable assumptions.
20.OUTLETS AND FRANCHISEE INFORMATION: Where the franchise stats are disclosed as to the
number of company-owned outlets and franchises outlets in operation for the last three years.
21.FINANCIAL STATEMENTS: A franchisor must provide three years of financial statements to the
franchisee as part of the FDD. This includes balance sheets, statement of the operations, owner’s
equity, and cash flows.
22.CONTRACTS: This is where the franchisor outlines the franchise agreement. It may also include
financing agreements, product supply agreements, personal guarantees, software licensing
agreements, and any other contracts specific to the franchise’s situation.
23.RECEIPTS: This is the final section of the FDD. Here, the franchisor will review the disclosure and
business decisions outlined between the two parties and provide the franchisee with any additional
information.

23 SECTIONS
ANOTHER EXAMPLE OF
A FRANCHISE
DISCLOSURE
DOCUMENT
 FDR vs FDD vs Franchise Agreement

Franchise agreement
Franchise Disclosure Franchise Disclosure is a legally binding
Requirement is like document is like the contract between the
the rules of the game. game instructions. It franchisor and the
They define what provides players with franchisee. The
information must be detailed information franchise agreement
disclosed to players about the game, outlines the terms
before they can start including the rules, and conditions of the
playing. strategies, and risks. franchise
relationship.
THANK YOU
FOR
LISTENING!