All of the information included in a Franchise Disclosure Document (FDD) is important. A section to make a note of is Item 4: Bankruptcy. Continue reading to learn what you should know about Item 4 of the FDD and how one of the experienced franchise law attorneys at FortmanSpann, LLC can guide you through this pivotal document.
What is the purpose of Item 4 of the FDD?
Before all else, you must know that the FDD is a legal document and a prospectus that has been established by the Federal Trade Commission (FTC) in order for franchisors to disclose important pieces of business information to prospective franchisees.
Within the FDD, there are 23 sections, one of them being Item 4. Now, Item 4 is intended to provide prospective franchisees with critical information about a franchisor’s past and present financial stability. More specifically, the franchisor will have to disclose whether or not individuals identified in Item 2 previously filed for bankruptcy.
And if you can recall, Item 2 listed the following individuals alongside the franchisor, predecessors, parents, and affiliates:
- Individuals managing the franchise:
- The directors.
- The trustees.
- The general partners.
- The principal officers.
- Individuals managing the sales/operations of the franchise:
- The sales team members.
- The support team members.
What else should I know about Item 4?
Item 4 goes further than just stating whether or not any of the aforementioned individuals previously filed for bankruptcy. The following details should also be included:
- Whether an aforementioned individual has previously filed a petition as a debtor under the United States bankruptcy code.
- Whether an aforementioned individual has previously had a petition filed against a debtor under the United States bankruptcy code.
- Whether an aforementioned individual has previously obtained a discharge of debts, under the United States bankruptcy code, during the time they held such a title or position.
- Whether an aforementioned individual has previously obtained a discharge of debts, under the United States bankruptcy code, within a year of holding such a title or position.
And with this bankruptcy disclosure, you must also add the following:
- The debtor’s name.
- The debtor’s address.
- The debtor’s principal place of business.
- The debtor’s title or position.
- The debtor’s relationship with the franchisor.
- The original filing date.
- The material facts of the case.
- The name of the court.
- The case number and name.
- The discharge date of the debt.
- The plans for reorganization.
Nonetheless, it is essential that franchisors know whose and what bankruptcy information is required to be disclosed according to the FTC. So if you are a franchisor, you should not proceed with creating your FDD without the assistance of one of the skilled franchise law attorneys. Retain our services today.