Franchise Disclosure Documents (FDD)
Illinois Attorney for Writing FDDs
Franchise Disclosure Documents (FDD for short) is a document required by franchisors to provide to franchisees when selling a franchise. An FDD has 23 categories of items that franchisors must disclose such as the franchisor’s business experience, past lawsuits, a list of manuals and procedures, costs of investment, and more.
Several states, including Illinois, require some form of registration of a franchisor’s FDD. However, a state’s approval of the FDD does not necessarily mean the FDD is legally compliant, a franchisor should not rely on the state registration process for legal validation.
The process of creating and finalizing the FDD and franchise agreement can take 3-6 months, depending on your particular situation. Working with a franchise attorney increases the chance that you can sell your franchise sooner and acquire profits faster.
Becoming a franchisor is a great way to grow a business quickly without having to invest in actual inventory, land, or other start-up costs. Rather, a franchise system allows a franchisor to sell the ideas and processes of a successful business model. Instead of investing more money to grow a business, a franchisor can even make money by selling the business model.
Once your FDD and franchise agreement are complete, you can sell your franchise and must give franchisees at least 14 days to make a decision.
If you sell your franchise without an FDD, you risk incurring thousands of dollars of penalties, having your franchise shut down, and not being able to sue your franchisees for any breach of their obligations.
Motiva Business Law helps franchisors, just like you, help you create your Federal Disclosure Documents (FDDs) and franchise agreements, and any other necessary documents you need for your franchise system. We serve businesses in Oak Brook, Burr Ridge, Naperville, Hinsdale, Lombard, Addison, Downers Grove, Oak Park, Darien, Chicago, Lisle, Westmont, Willowbrook, Clarendon Hills, and the Chicagoland Area
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When is the Best Time for Franchisors to Work with a Franchise Attorney?The best time to involve our franchise attorneys is when before you want to sell your franchise system to a franchisee. The law requires franchisors, in most situations, provide a Franchise Disclosure Document (FDD) with a list of 23 disclosures. Selling a franchise without a FDD or franchise agreement can result in serious fines to a franchisor. In addition, if a franchisor sells a franchise to a franchisee illegally and the franchisee violates the franchise agreement, a franchisor will likely not be able to recover its rights because the franchisor is in violation. Many states also require that a franchisor register their franchise. Our Firm likes to get involved early in the process to help a franchisor do things right the first time. We help draft:
- Franchise Agreements
- Franchise Disclosure Documents (FDD)
- Multi-Unit Franchise Agreements
- Area Development Franchise Agreements
- Sub-Franchisor Agreements (also known as Master Franchise Agreements)
Benefits of Working with a Franchise LawyerMany business owners often “license” their business model and trademark to a franchisee. This is commonly known as an “accidental franchise” and a franchisor may be in serious violation. The Federal Trade Commission (FTC) defines a franchise (known as the Franchise Rule) as (i) the grant of a trademark, (ii) the franchisor exerts or has the authority to exert significant control or assistance over the operation of the business, and (iii) the franchisee pays the franchisor or its affiliate a fee (typically at least $500). As you can see, a franchise is pretty easy to create and definition is pretty broad. There are some exemptions, but this is the general rule that anyone who is looking to sell their business model should be mindful of.
The 23 FDD Disclosures
When creating your FDD, you must disclose the following:
- The Franchisor and Any Parents, Predecessors and Affiliates
- Business Experience
- Bankruptcy history
- Initial Fees
- Other Fees
- Estimated Initial Investment
- Restrictions on Sources of Products and Services
- Franchisee’s Obligations
- Franchisor’s Assistance, Advertising, Computer Systems and Training
- Patents, Copyrights and Proprietary Information
- Obligation to Participate in the Actual Operation of the Franchise Business
- Restrictions on What the Franchisee May Sell
- Renewal, Termination, Transfer and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Outlets and Franchisee Information
- Financial Statements
- Receipts of FDD
If you have need help with writing your FDD, contact Motiva Business Law to schedule a consultation with our franchise attorney.
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When you are selling your franchise, your obligations include providing certain disclosures to a franchisee in a document called a “Franchise Disclosure Document” (FDD) and a Franchise Agreement. Franchisors also must allow a franchisee at least 14 days to review a FDD and franchise agreement before being expected to sign. Once you sell your franchise, your obligations include:
- Maintaining your trademark and brand.
- Providing your operational systems and manuals.
- Provide training and ongoing support.
- Not selling conflicting territories to franchisees.
By franchising your brand, you will take the role of the franchisor, whereby you create a business that others can copy, but without becoming investors in your actual business. To become a franchisor, there are certain requirements such as creating an FDD and clear written business model, train franchisees, providing support, and collecting payments.
Technically, franchisees do “own” their franchisee business. However, even though they operate independently and own the assets they purchased, such as equipment and furniture, they do not own the overall brand. Franchisees also cannot deviate from the franchisor’s business model without the franchisor’s consent. However, a franchisee can sell his or her business with the franchisor’s consent.
- Fees: This includes the initial franchise fee and ongoing royalties and other fees.
- Territory: The area where the franchisee has the exclusive right to operate.
- Operations: Guidelines and standards for the operation of the franchise.
- Intellectual property: The use of trademarks and intellectual property.
- Support: The extent to which the franchisor will assist the franchisee.
- Termination and renewal: The conditions under which the parties can cancel or renew the agreement.
To establish a franchise as a franchisor, the legal costs can cost from $60,000 upward, to create the whole system.
A franchisee can negotiate certain terms of a franchise agreement. Generally, a franchise system needs to be uniform among franchisees, so there are some limitations regarding the royalties and fees. Otherwise, how much a franchisee can negotiate depends more on each party’s leverage.
- Guiding you along the franchising process, navigating the legal aspects of the agreement, and helping you make informed decisions.
- Review the FDD and franchise agreement to ensure your deal is profitable and has the most favorable terms. Also, a lawyer will help you understand the implications of the contract.
- Identify and minimize risks related to the transaction
- Draft, review, and negotiate other required contracts, such as lease agreements and employment agreements.
- Ensure you comply with the local, state, and federal franchise laws.
Whether a franchisee can own more than one franchise depends on the franchise agreement. Some franchise agreements restrict a franchisee from engaging in all other businesses, while other franchises only prevent the franchisee from owning competing businesses. However, the ideal and most profitable way to be a franchisee is to be a franchisee of more than one location. Franchisees do this by entering into multi-unit franchise agreements or area development agreements. Over time, a franchisee makes more money with less effort since the franchisee is just repeating the same business model over and over again.