What is the 14 day hold on an FDD and how does a franchisor count the required 14 day hold that a franchise prospect must have on an FDD?
Under federal law, and the law of most states which have franchise laws, in order to enter into a franchise agreement or receive funds from a prospective franchisee, the prospective franchisee must first hold the FDD For 14 calendar days.
The law makes clear that those 14 calendar days must have “book ends,” in other words, the day of disclosure on the FDD, and the day of the execution of the franchise agreement (or payment of money to the franchisor) must be outside the 14 day hold.
So, if a franchisor furnishes an FDD to a prospect on June 1, then on June 16, the franchisor can enter into a franchise agreement and receive funds from the prospective franchisee.
Oddly, even though that is a 14 day hold, plus 2 book ends, which equals 16, when one subtracts June 1 from June 16 (16-1 = 15) the result is 15.
Please also note these additional rules on the 14 day FDD hold:
- Iowa requires that a franchisor with a net worth of $1M or less give a prospect the Disclosure Document at the earlier of the first personal meeting or 14 calendar days before the prospect signs a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
- New York requires the Company to give a prospect the Disclosure Document at the earlier of the first personal meeting or 10 business days before the execution of the franchise or other agreement or the payment of any consideration that relates to the franchise relationship.
- Michigan requires the Company to give a prospect the Disclosure Document at least 10 business days before the execution of any binding franchise or other agreement or the payment of any consideration, whichever occurs first.
A franchisor must furnish a copy of the FDD to a prospective franchisee earlier in the sales process if the prospect makes a reasonable request for an FDD.