Franchise Your Business

Franchise Disclosure Document (FDD) vs. Franchise Agreement (FA)

The FDD “requires” you to pay a royalty?  Did the franchisee “default” the FDD?  No!  Rather, the FA requires the franchisee to pay a royalty. It describes the obligations which could trigger a default.  The FDD just provides information about the royalty and defaults.  The FDD and the FA, both important legal documents in franchising, are often mistakenly used interchangeably.

The FDD is an informational document that gives information about the franchise, franchise investment and the franchise agreement.  It discloses information.  The FDD does not create a legal obligation.  The FDD receipt page is signed by the franchise prospect to acknowledge the date the document was received, but it does not create a legal obligation.

The FA is a binding legal contract that is signed by both the franchisor and franchisee.  It is an agreement to do something (open and operate a franchise) and creates legal obligations.  The FA controls the relationship between the franchisor and franchisee for the term of the franchise.

You can analogize the way an FDD and FA work together to a rocket launch:

Think back to the last time you watched a space shuttle being launched into space.  The fuel tanks propel the space shuttle into space.  Once the tanks successfully launch the space shuttle into space, they fall back to the Earth and the space shuttle continues on its journey alone.  As long as there isn’t an issue with the fuel tanks, they will have done their job to propel the space shuttle into space.  Once the space shuttle is in space, it has all the tools to handle the rest of the journey on its own.

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In the franchise world, the FDD is the fuel tank(s) and the FA is the space shuttle.  The FDD launches the FA on its franchise journey.  As long as there are no issues with the disclosures in the FDD, the FDD will have done its job and the FA will control the journey on its own.  In the world of space shuttles, the astronauts will likely know right away whether the fuel tanks have done their job because the space shuttle will have made it into space.  Unfortunately, in the franchise world, a defective FDD may make itself known later, after the initial launch. But the FDD, like the fuel tanks, will still only come up again if it didn’t properly do its job (false statements, missing information, etc.). Otherwise, the FA governs the franchise relationship until the next launch (renewal of the franchise).