Common FDD Terms Explained
Franchise Disclosure Document key terms & Definitions
The Franchise Disclosure Document (FDD) is a legal document that franchisors must provide to prospective franchisees. It helps buyers evaluate the opportunity by disclosing key details about the franchise system. Here are important terms you’ll encounter in an FDD:
Audit or Financial Statements
Financial reports that show the franchisor’s financial health, typically audited by an independent CPA.
Current Franchisees
A list of existing franchise owners within the system (required in the FDD), including their contact information.
Estimated Initial Investment
An estimate of the total startup cost to open a franchise, including fees, equipment, real estate, working capital, and other expenses.
Franchise Disclosure Document (FDD)
A document required by law (in the U.S.) that provides key information about the franchisor, fees, support, legal obligations, and franchisee data.
Franchise Fee
The upfront, one-time fee paid to the franchisor for the right to operate a franchise.
Franchisee Obligations
Specific duties and actions the franchisee must perform (outlined in the FDD and Franchise Agreement).
Franchisor’s Obligations
Services and support the franchisor must provide to the franchisee.
Item 19 (Financial Performance Representation / FPR)
An optional section where the franchisor may provide historical financial performance data of franchise locations.
Item 20
A section that lists the number of franchised and corporate-owned outlets, as well as openings, closures, and transfers over the past few years.
Litigation History
A required disclosure of any material litigation involving the franchisor or its principals.
Renewal
Terms governing whether and how a franchisee can renew their franchise agreement after the initial term ends.
Territory
Details regarding any exclusive or protected geographic area granted to the franchisee.
Termination
Circumstances under which the franchisor or franchisee can terminate the franchise agreement.
Transfer
Terms regarding the sale or transfer of the franchise to another party.
Need some more information?
We get it – there’s a lot to research when it comes to franchise ownership. We put together a few more glossaries with common franchise terms for you to help you navigate this process. Feel free to keep this handy for the next time you’re doing your own franchise due diligence.