Franchise Disclosure Documents: What Are They and Why Are They So Long?
When I was a franchisor, there was always some hesitation to send our FDD to a potential franchisee. Why? Well, for starters, it's was hefty document containing lots of legal jumble that could easily leave the reader blurry-eyed and disinterested. Also, if the recipient isn't prepared for a 250+ page document, then just the size of the file could be enough to send them running. I had to be sure to explain that the Franchise Disclosure Document spells out everything there is to know about a franchise--from who its founders are, to how many franchisees have defaulted, to the schedule of payments and fees. Most people who are interested in a franchise aren't prepared to receive such a hefty document, but after explaining that it's regulated by the government the same way an IPO is regulated by the SEC, the initial shock seems to be taken down a notch.
So why is it that a Franchise Disclosure Document is so long? Is it just nit-picky attorneys putting anything and everything they possibly can into the document? That may be part of it, but there's more. Here are three reasons why the FDD is such a massive document.
1. The FDD is regulated by the Federal Trade Commission
Franchisors, and their attorneys, aren't at liberty to draft a Franchise Disclosure Document however they'd like; the Federal Trade Commission, by the Code of Federal Regulations (16 CFR 436.5), specifies exactly what needs to be in the document. This means that the Items listed in the document are not arbitrary: every franchise opportunity should have in their Franchise Disclosure Document Item 1: The Franchisor, and any Parents, Predecessors, and Affiliates, Item 2: Business Experience, and so on, all the way through Item 23: Receipt of the FDD.
If the franchisor isn't compliant with the exact details of the CFR, then any sales of a franchise could be voidable. Ouch. So the blame here goes to the federal government--it created the code that all franchisors must abide by, and failure to do so just means trouble.
2. Lawyers Like to Cover Their Bases. All of Them.
Lawyers know that words matter. In my first semester of law school, our Civil Procedure professor told the class that President Clinton's statement of "that depends on what the meaning of 'is' is" actually wasn't that scandalous for a lawyer to say. I didn't quite get it then, but I get it now: words matter.
So when it comes to contracts, of course the words we choose matter. The words matter to include and exclude principles, and they matter to make sure everything is articulated in a way that is clear and could leave no room for misinterpretation. That's not to say that the Franchise Disclosure Document should be filled with centuries-old legalese, but it will likely be filled with LOTS of words that serve to protect the interests of the franchisor.
The franchisor is the author of the recipe, so to speak, and it has an interest in protecting its trademark, trade secrets, and overall brand image. This means that a typical Franchise Agreement (which is contained in the FDD) will likely be very heavy-handed towards the franchisor. And heavy-handed contracts tend to be very wordy and lengthy, naturally.
3. It Contains the Franchise Agreement, Financials, and Other Exhibits
The mandatory disclosures that must be made in the FDD per 16 CFR 436.5 is just information about the franchise--its history, financial health, use of public figures, etc. The actual terms of franchise ownership are included in the Franchise Agreement, which is included as an exhibit of the Franchise Disclosure Document.
As a novice franchisor I asked my franchise attorney if I could send the FDD without the Franchise Agreement, just to make the document look a little less intimidating. The answer was, and still is, no. The Franchise Disclosure Document must contain the default terms of franchise ownership found in the Franchise Agreement.
Also included as exhibits in a FDD are audited financial statements, the table of contents of the operations manual, lists of franchise owners with contact information, and other miscellaneous contracts such as non-disclosure agreements for employees. These items on their own are not necessarily lengthy, but when tacked on to an already hefty legal document, it makes it seem like the scrolling to get to the bottom of the FDD will never end.
Franchisors are required, by the FTC, to provide prospective franchise owners with a Franchise Disclosure Document before selling them a franchise. They're complicated and lengthy documents because they have to be. The government says so. And lawyers say so.
If you've received a FDD and want help navigating through it, reach out. I'd love to help.