FDD stands for “Franchise Disclosure Document”. The purpose of this document, which is required under federal law, is to give buyers of a franchise information to help them make a decision in a uniform format. The uniform format of 23 Items theoretically allows buyers to compare one system to another. The FDD however is not the contract between the franchisor and the franchisee, although it does have a copy of the contract (the Franchise Agreement) as one of its exhibits.

An analogy are the multiple disclosures that public companies have to make to give their shareholders inside information that unless required by law to disclose they would not otherwise get. As a franchisor, you are a semi-public company and viewed that way under federal and many state laws. The law requiring you to prepare an FDD is to help level the information playing field so that anyone signing a franchise agreement can make an informed decision. You can’t legally sell a franchise (signing a contract or collecting money) unless you have a valid FDD and give (disclose) it to a prospective franchisee in advance.

Before we get into the specifics on the various sections of the FDD, let’s start with what a franchise is. In its simplest form, a franchise is a license agreement for the use of your intellectual property. When someone purchases a franchise, they’re not actually buying a business; they are starting their own business whose foundation is renting your intellectual property. As a franchisor, you will teach someone how to use your brand and share your previous successes and failures. They will also be joining a network of peers that are in the same business. As the brand leader, your role is to create a successful ecosystem around your brand and business practices.

Franchisees don’t own the brand. They are licensed to use the brand and operating system for a period of x-number of years. As the owner of the brand, it is your role to ensure they operate it in such a way that it enhances the overall system. The contract you will sign with them, the Franchise Agreement, gives you that legal authority to enforce your brand standards and gives them the right to use your brand. The FDD is the document you must give them before they sign the Franchise Agreement and commit to being a franchisee.