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 with the opportunity.
Item 10: Financing
What You’ll Find
If a franchisor (or its affiliate) offers financing of the initial franchise fee, construction costs or any other amounts to be paid to the franchisor, it must disclose the terms of its financing arrangements in Item 10. You don’t often see Item 10 financing disclosures (because most franchisors don’t offer financing); but, when you do, they tend to be fairly comprehensive as required by the Federal Trade Commission’s Franchise Rule.
Why You Care
If you are considering entering into a financing arrangement with your franchisor, you want to make sure that you are fully aware of the terms and conditions involved. In addition, you should confirm that the terms of the franchisor’s financing agreement are consistent with the disclosures in the FDD.
Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
What You’ll Find
Item 11 tends to be one of the longest Items in most franchisors’ FDDs. This is because it covers a lot of information. Mandatory disclosures in Item 11 include: the franchisor’s pre-opening obligations (including training), site selection assistance and requirements, and the franchisor’s ongoing obligations during the term of your franchise agreement.
Why You Care
Just about everything disclosed in Item 11 should also be covered in your franchise agreement. While you should read Item 11 carefully to make sure you understand and are satisfied with the level of assistance the franchisor offers, you should be particularly careful to ensure that any material obligations are also clearly outlined in the franchise agreement.
Item 12: Territory
What You’ll Find
In Item 12, the franchisor must disclose the minimum size, conditions and other key terms related to your franchise territory (assuming one is provided).
Why You Care
In many industries, an exclusive (or, at least protected) territory can be critical to individual franchisees’ success. Your territorial protections should be sufficient to ensure that you will not face undue competition from the franchisor or other franchisees.
Item 13: Trademarks
What You’ll Find
Item 13 includes information on whether the franchisor’s principal trademarks are (i) registered, and/or (ii) subject to litigation.
Why You Care
A recognizable trademark can provide tremendous value to a franchise system. Conversely, lack of trademark protection can easily lead to undesirable consequences for franchisees. Before you buy a franchise, you want to make sure that the franchisor is taking appropriate steps to protect its trademarks throughout the term of your franchise agreement.
Item 14: Patents, Copyrights, and Proprietary Information
What You’ll Find
Item 14 includes registration and litigation information regarding any patents, copyrights or other proprietary information owned by the franchisor.
Why You Care
Most franchisors do not have any patents to disclose, but some will make general disclosures regarding protection of copyrights, trade secrets and other confidential information. If your franchisor’s FDD includes any affirmative disclosures in Item 14, you will want to make sure you have a clear understanding of how these intellectual property rights will affect your franchise operations.
Request a Fixed-Fee Franchise Review with Franchise Attorney Jeffrey M. Goldstein
At the Goldstein Law Firm, we provide fixed-fee franchise reviews for prospective franchisees nationwide. If you are considering a franchise opportunity and would like to know more about what is in your franchisor’s FDD and franchise agreement, inquire about a franchise review online or call (202) 293-3947 today.
