Understanding the Jack in the Box Franchise Disclosure Document?

The FDD might be the most important document in franchising. Scroll down to learn why as we demystify this industry term for those who are looking to buy a franchise!

 

Unless you’ve owned a franchise or you’ve been through the franchise sales process before, you’ll probably be asking yourself, “What is an FDD?”

At some point in the process of buying a franchise, you’ll be presented with the “FDD” terminology. 

There’s a lot of “mystery” around this document in the franchise sales process because most people have never heard of it or haven’t worked with it previously. Unless you work for a franchisor or are looking to buy a franchise, you probably have had zero reason to even open an FDD.

So fast forward and now you’re looking to buy a franchise and we’ve shared with you that we need to disclose you with the Jack in the Box FDD before we can move forward in the  sales process. You’re being asked to sign a large document and you have no clue what it is or what you’re getting into. It’s understandable to have some hesitancy but we’ve got your back. The goal of this article is to provide some context around:

  • What the FDD is
  • Why the FDD is then most important document in franchising 
  • The 23 Items within the FDD
  • Why acknowledging the FDD is required to move forward 
  • and much more!

So let's jump right in and learn what the FDD is and is not.

Understanding the Role of the FDD in the Franchise Buying Process

Every franchisor in the United States is required by law to have a Franchise Disclosure Document or “FDD” for short.

Outside of a few notable exemption exceptions, the franchisor must provide every potential franchisee a copy of the FDD. The FDD itself is a very robust document, and it’s not uncommon to see FDD’s over 300 pages! At Jack in the Box, our FDD is over 600 pages! But don’t fear the size of this document, because all the information packed between those pages is for your benefit!

That’s right, the FDD is full of information that will help answer your questions about your brand of choice. Not only is this document extremely helpful, but you also receive all this information before you ever have to commit to the brand or sign a contract. What an amazing benefit to have for potential buyers!

Understanding the FDD is made much easier when you understand its format. Within the FDD, there are 23 different items presented to potential franchisees. Each of these items provides more context about what is required of you as a franchisee as well as what the franchisor will do for you. You’ll find initial costs, estimated investment, what celebrities the brand endorses and so much more! 

So What Will You Find in the FDD?

The FDD is broken into 23 different items. Those items are;

Item #1 - The Franchisor and any Parents, Predecessors, and Affiliates.
Item #2 - Business Experience
Item #3 – Litigation
Item #4 – Bankruptcy
Item #5 – Initial Fees
Item #6 – Other Fees
Item #7 – Estimated Initial Investment
Item #8 – Restrictions on Sources of Products and Services
Item #9 – Franchisee’s Obligations
Item #10 – Financing
Item #11 – Franchisor’s Assistance, Advertising, Computer Systems and Training
Item #12 – Territory
Item #13 – Trademarks
Item #14 – Patents, Copyrights, and Proprietary Information
Item #15 – Obligation to Participate in the Actual Operation of the Franchise Business
Item #16 – Restrictions on What the Franchisee May Sell
Item #17 – Renewal, Termination, Transfer and Dispute Resolution
Item #18 – Public Figures
Item #19 – Financial Performance Representation
Item #20 – Outlets and Franchisee Information
Item #21 – Financial Statements
Item #22 – Contracts
Item #23 – Receipt
 

Within the FDD, you’ll find things like initial costs, estimated initial investment, territory definitions, fees, trademarks, renewal terms, and so much more.

As much as I’d like to dive into the detail of each of these Items, that would require a blog entirely too long to keep anyone interested. We’ll dive deeper into each of these Items in further posts, but for now, let’s just stay focused on the FDD as a whole.

What Happens Once You Receive the FDD?

Once you receive your FDD, you’ll be required to acknowledge the receipt of this document if you wish to continue down the franchise sales process. This Acknowledge of Receipt is found in Item 23 of the FDD and many times, it’s sent digitally with the option of electronic signature to make signing much easier.

Many people think they are “locked in” or “contractually obligated” by signing this document but you are not. You are under no obligations until after you have signed the Franchise Agreement much later in the sales process.

You might ask yourself, “So if it’s not an obligation, why is a signed acknowledgment required?” Simply stated, the FTC(Federal Trade Commission) requires franchisors to collect this information from potential buyers before they can move forward with buying a franchise. There are some exceptions to this rule like you’ll find with a Large Franchisee Exemption rule. To qualify for this FDD exemption, these criteria must be met;

“The Rule requires the FTC to adjust the thresholds for inflation every four years based on the Consumer Price Index. The exemptions from compliance with the Rule, which will take effect July 1, 2020, are:

  • Sales where the buyer pays less than $615 (currently $570) for the franchise;
  • Sales requiring a large investment where the franchisee pays at least $1,233,000 (currently $1,143,100), excluding the cost of unimproved land and any franchisor (or affiliate) financing; and
  • Sales to large entities, such as multi-unit franchisees, airports, hospitals, and universities that have been in business for at least five years and have a net worth of at least $6,165,500 (currently $5,715,500).”

In the case of new franchise buyers, you’ll probably not qualify for this exemption, but it’s great to ask your franchise recruitment team member just in case.

It’s also important to note that the Item 23 (FDD Acknowledgement) is an FTC requirement that insures you’ve received the franchise disclosure document and provides accountability to franchisors in staying compliant in providing this document to you in the sales process.

What is the Franchise Disclosure Period?

We’re not done with the importance of the Item 23 FDD Acknowledgement yet! Your signature on the Item 23 does more than acknowledge your receipt of the FDD, it also begins the 14-Day Disclosure period. This required disclosure period requires franchisors to wait a minimum of 14 full days before any franchise agreements are signed and/or money is collected, and it applies to all 50 states. Without your signed acknowledgement, the sale of the franchise can’t continue as the brand issuing the document can’t begin the 14-day waiting period. So, if you’re looking to buy a franchise from this brand, it might be a good idea to sign the acknowledgement so your purchasing process isn’t further delayed.

There’s also a 7-Day Disclosure Period that must be met. This disclosure period can run congruently to the 14-day Disclosure Period. This rule requires that the franchisee receive their complete agreements for a full seven-days before signing. Most FDD’s include a full copy of the franchise agreement, which is how these two periods might run congruently. Where these would not run congruently is if additions or changes are made to the franchise agreement after you’ve been disclosed and served the full 14-day waiting period. For that example, the 7-Day Disclosure Period would apply and the full seven day waiting period would be required.

The good news is that your franchise recruitment member should walk you through this process, but it’s good to know so you’re more aware of the requirements in the franchise sales process.

In conclusion, the FDD is an important tool for potential franchisees when evaluating a franchise system. There are some requirements for you as a potential franchisee to perform, but nothing too arduous. The FDD is there for your benefit, and I hope you take advantage of this wonderful tool.

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