CFC CFC Franchise Due Diligence & Disclosure Documents 1 — Questions and Answers
Question 1: How many calendar days before signing a franchise agreement or paying any money must a franchisor provide the FDD to a prospective franchisee under FTC rules?
- 7 days
- 10 days
- 14 days (Correct answer)
- 30 days
Correct answer: 14 days
The FTC Franchise Rule requires franchisors to deliver the FDD at least 14 calendar days before any agreement is signed or money is paid.
Question 2: How many items are contained in a standard FDD?
- 19
- 21 (Correct answer)
- 23
- 25
Correct answer: 21
The FDD is structured around 23 standardized items, each covering a specific aspect of the franchise offering.
Question 3: Which FDD item lists all current and former franchisees, including their contact information?
- Item 18
- Item 20 (Correct answer)
- Item 22
- Item 19
Correct answer: Item 20
Item 20 of the FDD provides a list of current franchisee outlets and former franchisees who left the system in the prior fiscal year, including contact details.
Question 4: What is the primary purpose of a franchisee validation call during due diligence?
- To negotiate the franchise fee with the franchisor
- To gather candid firsthand feedback from existing franchisees about their experience (Correct answer)
- To complete the required FDD review period
- To receive the franchisor's Item 19 disclosure
Correct answer: To gather candid firsthand feedback from existing franchisees about their experience
Validation calls allow prospective franchisees to speak directly with current franchisees to gain unfiltered insights about franchisee satisfaction, support quality, and actual unit economics.
Question 5: What does Item 12 of the FDD address?
- Computer systems requirements
- Territory rights and exclusivity provisions (Correct answer)
- Franchisee obligations
- Renewal terms
Correct answer: Territory rights and exclusivity provisions
Item 12 discloses the franchisee's territory, including whether it is exclusive, protected, or subject to encroachment by other franchisees or company-owned units.
Question 6: Which FDD item discloses any pending or prior litigation involving the franchisor or its principals?
- Item 1
- Item 3 (Correct answer)
- Item 5
- Item 9
Correct answer: Item 3
Item 3 of the FDD requires franchisors to disclose pending and historical litigation, including actions brought by franchisees, regulators, or third parties.
CFC CFC Franchise Due Diligence & Disclosure Documents 1
How many calendar days before signing a franchise agreement or paying any money must a franchisor provide the FDD to a prospective franchisee under FTC rules?