The following excerpt is from Rick Grossmann’s bookFranchise Bible. Buy it now fromAmazon | Barnes & Noble | IndieBound
The heart and soul of the disclosure portion of the Franchise Disclosure Document (FDD) — and indeed its very purpose — is set forth in the Items. Each Item is given a specific title (which cannot be altered), and within each Item, the franchisor is required to provide the answers to a myriad of FTC-mandated questions. For a complete list of the questions in each Item, take a look at the NASAA Guidelines on our companion website.
Following is the list of Items (by correct title) along with a brief description of the content to be found there.
Item 1. The Franchisor, and any Parents, Predecessors and Affiliates
Item 1 gives you the franchisor’s background and that of any parent company, predecessors and affiliates. A predecessor is defined as “a person from whom the franchisor acquired directly or indirectly the major portion of its assets.” An affiliate is defined as “a person controlled by, controlling, or under common control with the franchisor.”
Item 2. Business Experience
This Item gives you the past five years’ worth of the personal business experience of the franchisor’s directors, trustees, general partners, officers and any other individuals who’ll have management responsibility relating to the offered franchises.
Item 3. Litigation
In this Item, the franchisor must disclose any material litigation involving the franchisor and predecessor, parent and affiliate, if the litigation involves claims about the franchisor’s sales process, their performance under the franchise documents and claims of antitrust, fraud, unfair or deceptive trade practices, or comparable allegations. The franchisor must also disclose any franchisor-initiated litigation against its franchisees and any other business litigation (even if it’s not franchise-related) if, at the end of the day, the litigation negatively impacts the franchisor’s financial condition or their ability to operate a franchise.
Item 4. Bankruptcy
This Item must disclose any bankruptcy in the past ten years that involved the franchisor and any parent, predecessor, affiliate, officer or general partner of the franchisor, or any other individual who will have management responsibility relating to the sale or operation of the franchise.
Item 5. Initial Fees
Here, the franchisor (and any of their affiliates) must disclose all of the initial fees they charge to the franchisee before opening. Such fees include the initial fee paid to purchase the franchise rights (often called the “initial franchise fee” or IFF), computer or point-of-sale equipment that must be purchased only from franchisor or their affiliates, and similar fees.
Item 6. Other Fees
This section of the FDD advises you of any other fees you’ll have to pay to the franchisor or an affiliate as well as costs that are collected by the franchisor for third parties, or that are otherwise imposed. Line items include a statement of the royalties, advertising fees, service fees, training fees, renewal fees and other similar one-time or ongoing charges.
Item 7. Estimated Initial Investment
In this section, the franchisor must disclose a range of the minimum and maximum of all fees, costs and expenses that the franchisee will incur prior to opening the business, including the initial franchise fee, real property expenses such as rent and construction costs, the cost for computer equipment and similar line items. The expenses must include both pre-opening expenses and those incurred during the “initial phase,” which is at least three months or a reasonable period for the industry.
Item 8. Restrictions on Sources of Products and Services
Franchisors require…