It’s easy to get confused because these acronyms are often used interchangeably, but they’re not, in fact, the same document. So let’s clear the air.
In July, 2007 the Uniform Franchise Offering Circular (UFOC) was renamed to the Franchise Disclosure Document (FDD) by the U.S. Federal Trade Commission (FTC). Franchisors were given until July 1, 2008 to make the switch.
Along with the new name came some new requirements. It took the FTC twelve years to finalize these changes. There are still 23 items, but there were many changes made to these rules. We’ll touch on the more substantive ones.
FDD Electronic Delivery Allowances
Now, in addition to being able to deliver the disclosure document in hard copy or CD-ROM, franchisors can also e-mail it to potential franchisees or offer a download from a website. The cover page of the FDD also now includes the franchise company's website and email address, if the company has these. The new rule also allows a prospective franchise buyer to “sign” a FDD receipt electronically. (Welcome to the 21st century, FTC!)
There are some electronic prohibitions too though. Disclosures must not include electronic features such as pop-up windows, audio, video, and links to external documents. Essentially, if you can’t store it on a local computer or print it, it’s prohibited. However, features that navigation throughout the FDD are allowed, e.g., scroll bars, search features, and internal links. Franchisees must be advised of the different formats that are available.
First Meeting Between Franchisor and Franchisee
Previously, a franchisor was required to provide a potential franchisee with the UFOC document at their first meeting. Now franchisors are not required to provide a potential franchisee the FDD at their first meeting, but it needs to be provided at least 14 calendar days before the franchisee signs a contract. However, the franchisee may reasonably request the document earlier in the process.
In the interest of simplifying the franchise closing process, the old "five business day" rule has been eliminated. In the UFOC, final documents were required to be provided five business days before closing. However in the FDD, the franchisor must provide the final agreement seven calendar days before execution only if the franchisor makes unilateral and material changes to the franchise agreement or other agreement attached to the FDD. Switching to calendar days from business days was designed to avoid some of the prior confusion.
Increased Franchisor Transparency
The FDD includes more detailed information about direct and indirect parent companies, including disclosure of any lawsuits or bankruptcies. For example, the franchisor is required to reveal whether any officer of the franchise has any interest in any approved suppliers.
The franchisor must also include in the FDD information about whether the franchisor or any affiliates make use of any other types of distribution channels such as the Internet, telemarketing, or catalog sales.
Also, the franchisor must notify potential franchisees of any restrictions prohibiting previous or current franchisees from discussing their experiences with prospects. If current or former franchisees have signed confidentiality clauses (also known as gag clauses) in agreements with the franchisor in the past three years, the disclosure document must include that.
Additionally, under the FDD, franchisors are also required to disclose how many franchises over the past three years were sold, terminated, or transferred. If a franchisor is selling a previously franchised channel, s/he must provide a supplemental disclosure with the name and contact information of the any previous owners from the prior five years. The franchisor must also include the reason for the changes in ownership.
For a full listing of what is required in the FDD, download the FTC’s Franchise Rule Compliance Guide.