FDD (Franchise Disclosure Document) Review

This month, we review the FDD (Franchise Disclosure Document) and the states that might require Franchisors to alter standard FDDs.

In my over three decades as a franchise consultant, I am often asked “What makes one franchise program succeed while another franchise program doesn’t?”

Rarely is there a single reason for success or failure in franchising.  Here, I will examine some of the factors that can help you create a successful franchise program including the FDD.

One of the issues to consider is state franchise registration laws.

Federal franchise laws require Franchisors create a Franchise Disclosure Document (FDD) and Franchise Agreement.  They also mandate the format and information to include in the FDD.  In addition, they stipulate that all prospective franchisees must receive the FDD no later than the first in-person meeting.

However, there is no federal franchise registration requirement.

States That “Could” Require FDD Alterations

Fourteen states have franchise registration laws that typically prohibit offering or selling franchises in the state until the designated state agency has approved the state franchise registration.

Often, these state franchise registration agencies are empowered to require Franchisors to alter their standard FDDs.  This is true even if the FDD complies with federal franchise laws. State franchise registration laws apply if (1) the Franchisor is located in a franchise registration state, (2) the prospective franchisee lives in a franchise registration state or (3) the franchise will be operated in a franchise registration state.

The fourteen states with state franchise registration laws include California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

Of these, Michigan only requires a notice along with the preparation of a state-specific cover page. These state franchise registration laws require the payment of a fee ranging from $50 to $750. In order to meet the specific state franchise registration laws, the Franchisor will also often incur legal fees.

A few states have less stringent state franchise registration laws. For example, North Carolina requires the filing of the company’s FDD and payment of a fee if a Franchisor does not have a federally registered trademark.