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What info must companies disclose to franchisees?

In a world where get-rich-quick schemes abound, there are still many in Alabama who believe hard work is the way to get ahead. Hard work and a little starter money, anyway, which is the appeal of buying a franchise. If it’s a chain, the marketing is already done; all you need is a lot of hard work and some business savvy, and you may have found a way to support your family and build an investment that you can retire on.

According to Entrepreneur, franchise disclosure documents can help would-be entrepreneurs make an informed decision about buying and running a franchise. The Federal Trade Commission requires that franchises make FDDs available to potential buyers a minimum of 14 calendar days before any money has changed hands or any contract is signed. This moratorium period gives the purchaser time to study the company’s financial picture, the contract, restrictions and more.

There are 23 types of documents that fall under the FDD rule, and they must be presented in an FTC-approved format and order. Some of the most important include:

  • Initial fees and other fees: These are two separate documents. One includes purchase price and additional fees due at the beginning of the franchise, while the other can include a variety of fees, such as training, annual fees and more.
  • Estimated initial investment: This is an average range of investment costs. It should include an estimate of what you should expect to put in as working capital as well.
  • Restricted products and services: The franchise can sell its products and services to you as long as it discloses this information, which includes how much revenue is generated through the sales. It also should show how much the franchise gets from third-party refunds.
  • Outlets and franchises: This is a table showing how many franchises were opened, terminated, closed and transferred during the last three years. You will also get contact information for current and previous franchisees so you can reach out to them with questions.
  • Financial statements: Three years of balance sheets, equity, cash flow and more that have been audited.
  • Contracts: You will get a copy of all contracts you must sign, including product-supply and software-licensing agreements.

With so many detailed contracts and much at stake, you should take your time to study the information and ask questions of the business and other franchisees as well. If you have any legal questions, consider meeting with an experienced attorney.

The information in this article, while important, is general in nature and is not intended to be taken as legal advice.

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