Move Over, UFOC, Here Comes the FDD

The FTC, after much consultation, has introduced a new document related to the franchise business. Known as Franchise Disclosure Document, it is based on the UFOC, but varies in different places.

First and foremost, the prerequisite that the persons responding to the franchise business for sale offer needs to meet the franchisor personally has been removed. It also stipulates that the franchisor may give the FDD to the prospective franchisees at any time, but it must be given at least 14 calendar days before any payment is required. This removed the trigger that the UFOC can be given only after personal meeting between the two. Secondly, the document is not only restricted to hand-written version, but can also be electronically distributed or presented in a CD-ROM. If electronically presented, the cover page is supposed to list the other ways the franchisee can get hold of an FDD. The franchisee receipt can also be sent electronically.

Some “sophisticated franchisors” have been exempted from providing any kind of disclosure for their franchises. It includes those franchisors whose franchisees are making an investment of $1 million dollars (apart from real estate and amounts that are franchise-sponsored). Franchisors in business for five years or more with net worth of at least $5 million are also exempted. Moreover, if the franchisee is an insider i.e. people who previously worked for the franchise system or managers with two years experience of the system, then too the franchisor is excused.

As for the item wise changes, there are many. But the most important are the changes made in the rules governing earning claims, disclosure of litigation history and disclosure of number of franchisees in the system.

From the point of view of the companies that are offering franchise business for sale, the plus points are that they don’t have to give a separate earning claim document and if they give an earning claim (called financial performance representation in FDD), they can give performance level of a subset of franchisees. They can provide a percentage of the number of franchisees that have reached or surpassed the “earning claim” based on the subset instead of the whole franchisee chain. But they are required to give details about any marked characteristics these subset outlets have and how they are different than other outlets. Another good point is that they don’t have to disclose the names of franchise brokers working for them.

The franchisees have also gained much from the new FDD. First of all, they will learn not only about litigation history of the company, but also that of the parent company which is anyway related to the franchisor. Secondly, it will contain the list of cases that the franchisor has started against its franchisees. Moreover, if the government has started any case against the franchisor or any of its associates in the last 10 years, it will also be there in the FDD. What’s more, the litigation and background of all franchisor employees related to the business of starting a franchise is supposed to be given. If a franchise location is sold and re-sold many times, it has to be shown as well, so that the would-be franchisees can know about any “churning activity” that is going on.

To learn more about the differences between the UFOC and the FDD, click here.

For help navigating these changes as you buy a franchise, contact brandEXPANSION.

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