This is Part 2 of our three-part series, Understanding Your Franchisor’s FDD. In Part 1, we covered Items 1 through 7. Here in Part 2, we cover Items 8 through 14: Item 8: Restrictions on Sources of Products and Services What You’ll Find In Item 8, franchisors are required to disclose any obligations for franchisees to purchase or lease necessary products or services either (i) from the franchisor, (ii) from a designated or approved supplier, or (iii) according to mandatory specifications. This includes: Supplies, fixtures and equipment Inventory Computer hardware or software (including POS systems) Real estate Any “comparable items related to establishing or operating the franchised business” Why You Care Purchasing controls can often mean higher purchasing prices for franchisees. When a franchisor negotiates a volume rebate with a supplier, this does not necessarily mean that savings get passed on to the franchisees. In fact, instead it can simply mean that franchisees lose the ability to shop for competitive pricing. Item 9: Franchisee’s Obligations What You’ll Find Item 9 is comprised of a cross-reference table that identifies where you can find various pieces of information (like site selection and pre-opening requirements) in the Franchise Disclosure Document (FDD) and the franchisor’s standard franchise agreement. Why You Care If you are not familiar with reviewing FDDs and franchise agreements (and most prospective franchisees aren’t), you can use the Item 9 table to get an overview of the key legal and business terms that will apply if you decide to move forward […]

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Pursuant to federal regulations and franchise laws in various states around the country, before selling a franchise, the franchisor must provide the potential buyer with a Franchise Disclosure Document (or “FDD”). Each franchisor’s FDD must closely follow a format that includes: A Cover Page A table of contents Specific information broken out into 23 “Items” Exhibits (including a copy of the franchisor’s standard franchise agreement) While understanding your franchise agreement needs to be a top priority, it is also important to critically assess the information contained in Items 1 through 23. In a series of three articles, we will summarize what you can (or should) expect to see when you open up your franchisor’s FDD. Item 1: The Franchisor and Any Parents, Predecessors and Affiliates What You’ll Find Along with general business information (like the franchisor’s name and address), Item 1 must contain: a description of the franchise business, the general market for the franchise system’s products or services, disclosures regarding the franchisor’s franchising history and whether it operates any company-owned outlets, and information about competition and industry-specific laws. Why You Care While Item 1 disclosures tend to be pretty general, prospective franchisees can uncover some key information in Item 1. For example, if the franchisor has a prior history in franchising (especially an unsuccessful one) or if the industry has unique legal requirements, this is certainly something you will want to know going into your franchise opportunity. Item 2: Business Experience What You’ll Find A five-year employment and business […]

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