FDD Update-Definitions You Need to Know

With the annual franchise disclosure document [FDD] update process well under way.  There are countless terms and definitions that you need to know.  Here is listing of some of the terms and definition.

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Annual FDD Update: The FTC franchise disclosure rule and state laws mandate that requires the franchise disclosure document or FDD to be update with the previous year’s audit financials, of listing franchise outlets, other previous year’s data no later than 120 days from the close of the fiscal year.
Material Change: A material change is any change that could affect whether a prospective franchisee will buy or not buy the franchise.  Conservatively any information that is contained in Franchise Disclosure Document [FDD] can be considered material.Therefore, any change in the information listed may be material change.  Per franchise disclosure laws, if a material change occurs the franchise disclosure document must be amend and amended state filings must be submitted.
Estimated Initial Franchise Investment. The estimate of initial franchise investment encompasses any expenditure that a prospective franchisee will incur in starting the the franchise business, including expenditure to the franchisors or any third parties such as insurance agents, vendors, and landlords.The estimated initial franchise investment is outlined in tabular form and the total estimated initial investment is listed on the franchise disclosure document cover.
The estimated initial investment is often used by franchise brokers, franchise magazines, and others to categorize franchise opportunities.
Officers, Directors, & Sellers The Officers, Directors, and Sellers are any persons who have management responsibility relating to the sale or operation of franchises offered by the disclosure document.A listing of Officers, Directors, and Sellers must be disclosed in the franchise disclosure document.  Pursuant to disclosure requirements, the Officers, Directors, Sellers must state their title and their work history for the last 5 years.
Additional information regarding Officers, Directors, and Sellers must be provide in the litigation, bankruptcy, and vendor/supplier interest items in the franchise disclosure document.
Franchisee that Left the System Any franchisee who has had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement or has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.Franchisee that left the system in the most recently completed fiscal year must be identified in a franchise disclosure document exhibit.
Financial Performance Representation [FPR] A Financial Performance Representation is any representation, including any oral, written, or visual representation, to a prospective franchisee, including a representation in the general media that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits. The term includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables.
Franchisors are not required to make Financial Performance Representation in the franchise disclosure document.  However, if no Financial Performance Representation is disclosed in the franchise disclosure document, the franchisors may only implicitly or expressly provide information to prospective franchisee regarding the potential sales, income, or profits.
Item 20 outlet definitions Non-Renewal:  A franchise outlet that was not renewed upon the expiration of the franchise agreement.
Reacquisition:  A franchise outlet that was returned to the franchisor during the term of the franchise agreement in exchange for cash, forgiveness of debt or other consideration.
Ceased Operation:  A franchise outlet that for any reason other than transfer, termination, non-renewal or reacquisition stop operating.
Signed But Not Open:  Signed but not opened, means the franchisee and franchisor have signed a franchise agreement, but the franchise outlet has not opened
Transfer:  Transfer means the sale or acquisition of a controlling interest in the franchise outlet to anyone other than the franchisor during the term of the franchise agreement
Termination:  A franchise outlet that prior to the end of the franchise agreement term is terminated by the franchisor without providing any money or consideration to the franchisee
Negotiated Prices A purchase agreement negotiated by the franchisor with suppliers, including price terms, for the benefit of the franchisee
Required Purchases Required purchases are any obligation on the part of the franchisee to purchase or lease goods, services, or supplies from a specific supplier for the establishment or operation of the franchise business.Required purchase must be disclosed in Item 8 of the franchise disclosure document.
Franchisee Associations An association of franchisees of the franchise brand.If the franchisor creates, sponsors, or endorses the franchisee association must be disclosed in the franchise document.
If the franchisee association is not created, sponsored, or endorsed by the franchisor, the association must only disclosed in the franchise disclosure document if [1] the organization is recognized under state law and [2] the association expressly requests annually to be included in the franchise disclosure document.

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