How to Disclose the Franchise Disclosure Document
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Franchises can only be offered and sold by disclosure of the then-current franchise disclosure document (the “FDD”). You understand the basics, but what’s next? Following best practices can help ensure your franchised business maintains compliance with state and federal disclosure laws.
disclosing the FDD
Disclosing the FDD to a prospective franchise buyer requires a careful consideration of business, legal, and practical considerations. From a business standpoint, the documents are often 150-250 pages long, full of legalese, and overwhelming. This makes timing important. From a legal standpoint, there are federal and state laws to comply with. While general rules and waiting periods apply in all cases, some states impose their own rules for disclosure timing, receipt, and record retention. From a practical standpoint, prospects may be wary of signing the receipt page and the document may raise as many questions as it answers.
This page will not attempt to dive into every scenario, but offers an overview of the general disclosure obligations and provides certain best practice tips. Federal law applies to disclosure in all 50 states. Certain states have enacted laws to supplemental laws, which may require disclosure at an earlier time.
The Federal Franchise Rule
§ 436.2 Obligation to furnish documents.
In connection with the offer or sale of a franchise to be located in the United States of America or its territories, unless the transaction is exempted under subpart E of this part, it is an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act:
(a) For any franchisor to fail to furnish a prospective franchisee with a copy of the franchisor’s current disclosure document, as described in subparts C and D of this part, at least 14 calendar-days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
(b) For any franchisor to alter unilaterally and materially the terms and conditions of the basic franchise agreement or any related agreements attached to the disclosure document without furnishing the prospective franchisee with a copy of each revised agreement at least seven calendar-days before the prospective franchisee signs the revised agreement. Changes to an agreement that arise out of negotiations initiated by the prospective franchisee do not trigger this seven calendar-day period.
(c) For purposes of paragraphs (a) and (b) of this section, the franchisor has furnished the documents by the required date if:
(1) A copy of the document was hand-delivered, faxed, emailed, or otherwise delivered to the prospective franchisee by the required date;
(2) Directions for accessing the document on the Internet were provided to the prospective franchisee by the required date; or
(3) A paper or tangible electronic copy (for example, computer disk or CD-ROM) was sent to the address specified by the prospective franchisee by first-class United States mail at least three calendar days before the required date.
How Early should the FDD be provided in the sales process
The Federal Rule establishes waiting periods which must be observed, but the rule does not generally dictate precisely when the FDD should be provided. There is one caveat to this point. The rule requires disclosure of the FDD upon reasonable request, and the failure to provide at that time is an unfair or deceptive trade practice in violation of the FTC’s rule. Further, certain states impose additional requirements, such as an obligation to provide a copy on or before the first in-person meeting. As a best practice, the FDD should be provided as soon in the sales process as practicable. The method of delivery is often as important as the time. Specifically, its is crucial that prospects understand that signing the “Receipt” pages does not create a contract and is simply to acknowledge receipt as the name implies. A franchise law firm will typically assist franchisors by managing disclosure, providing guidance, and creating and sending franchise agreements.
When is a document delivered?
The rule permits disclosure in various formats, but in the digital age, the best way to disclose an FDD is typically through a digital signature capture platform, like DocuSign, HelloSign, PandaDoc or some other reliable signature platform. These platforms provide an audit trail showing precisely when the document was sent, delivered, and signed. Best practice is go off the signed date in every case and take no chances when it comes to disclosure. Receipts must be retained and can be requested by state examiners. Further, certain states specifically define “delivery” to mean the date it was actually received.
Federally mandated waiting periods
Section 436.2 creates two separate waiting periods. First, the period applicable to all disclosure documents. Second, the period applicable when there are changes in the franchise agreement.
The 14 day waiting period
The federal Franchise Rule requires franchisors to furnish the FDD at least 14 days before any agreement is signed or any funds are received. While this seems simple enough, many franchisors fail to correctly calculate the 14 days. This 14 day waiting period does not count the day the FDD is delivered or the day the franchise agreement can be signed. For example, if the FDD is delivered on January 1 then the franchise agreement can be signed on January 16.
The 7 day waiting period
The federal Franchise Rule requires franchisors to furnish a revised franchise agreement and observe a 7 day waiting period when there is any unilateral and material change. So, what is a material change? Fill-in-the-blank provisions like a name or address are not material changes. However, other substantive changes are often a material change. One common material change is a territory description, because the FDD and its template franchise agreement do not define the territory. Therefore, as a practical matter, it is typically best practice to provide a completed PDF version of the final proposed agreement and then observe the 7 day waiting period. There are two things to consider when calculating this period. First, it can run concurrently with the 14 day waiting period. Second, the days are calculated in the same manner as the 14 day period. Meaning, if the revised franchise agreement is provided on January 10 then the franchise agreement can be signed on January 19.