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The following excerpt is from Rick Grossman’s e book Franchise Bible. Aquire it now from Amazon | Barnes & Noble | iTunes | IndieBound
The heart and soul of the disclosure piece of the Franchise Disclosure Memoir (FDD) — and certainly its very goal — is station forth within the Objects. Each Merchandise is given a explicit title (which cannot be altered), and within each Merchandise, the franchisor is required to gain the answers to a myriad of FTC-mandated questions. For a total record of the questions in each Merchandise, take a peek at the NASAA Tips on our companion online page.
Following is the record of Objects, along with a temporary description of the lisp material to be discovered there.
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Merchandise 1: The franchisor, any parents, predecessors and affiliates
Merchandise 1 affords you the franchisor’s background and that of any parent company, predecessors and affiliates. A predecessor is outlined as “a individual from whom the franchisor acquired straight or indirectly the major piece of its assets.” An affiliate is outlined as “a individual controlled by, controlling, or underneath fashionable management with the franchisor.”
Merchandise 2: Industry ride
This Merchandise affords you the past 5 years’ rate of the personal industrial ride of the franchisor’s directors, trustees, general partners, officers and any other individuals who’ll have management responsibility relating to the supplied franchises.
Merchandise 3: Litigation
In this Merchandise, the franchisor must allege any material litigation though-provoking the franchisor and predecessor, parent and affiliate, if the litigation entails claims about the franchisor’s sales direction of, their performance underneath the franchise documents and claims of antitrust, fraud, unfair or fraudulent trade practices, or comparable allegations. The franchisor must also allege any franchisor-initiated litigation against its franchisees and any other industrial litigation (even if or no longer it’s now not franchise-related) if, at the tip of the day, the litigation negatively impacts the franchisor’s financial condition or their ability to operate a franchise.
Related: Why You Will have to Aquire a Franchise Instead of Starting Your Have
Merchandise 4: Bankruptcy
This Merchandise must allege any bankruptcy within the past ten years that enthusiastic the franchisor and any parent, predecessor, affiliate, officer or general partner of the franchisor, or any other individual who will have management responsibility relating to the sale or operation of the franchise.
Merchandise 5: Initial prices
Right here, the franchisor (and any of their affiliates) must allege all of the initial prices they charge to the franchisee ahead of opening. Such prices comprise the initial price paid to purchase the franchise rights (normally called the “initial franchise price” or IFF), laptop or point-of-sale equipment that ought to be purchased handiest from franchisor or their affiliates, and similar prices.
Merchandise 6: Other prices
This piece of the FDD advises you of any other prices you may have to pay to the franchisor or an affiliate as smartly as prices that are serene by the franchisor for third parties, or that are in any other case imposed. Line objects comprise a statement of the royalties, advertising prices, provider prices, training prices, renewal prices and other similar one-time or ongoing charges.
Merchandise 7: Estimated initial funding
In this piece, the franchisor must allege a range of the minimal and maximum of all prices, prices and charges that the franchisee will incur earlier than opening the industrial, in conjunction with the initial franchise price, real property charges such as hire and improvement prices, the value for laptop equipment and similar line objects. The charges must comprise each pre-opening charges and those incurred for the duration of the “initial phase,” which is at least three months or a reasonable length for the trade.
Merchandise 8: Restrictions on sources of merchandise and services and products
Franchisors require franchisees to purchase the merchandise and services and products wished handiest from approved distributors. This piece lists the approved distributors and also calls out the franchisor’s specifications for allowing a fresh dealer into the system. This can title any income the franchisor receives from the specified purchases, in conjunction with rebates got by the franchisor from any supplier.
Merchandise 9: Franchisee’s obligations
This Merchandise lists your obligations as a franchisee, with references to the sections of your franchise agreement that contain the obligations. The goal of right here is to title your principal obligations underneath the franchise agreement and other agreements.
Related: Are You a Suitable Franchise Candidate?
Merchandise 10: Financing
If the franchisor sponsors financing for brand spanking fresh franchisees, it will probably be spelled out in this piece.
Merchandise 11: Franchisor’s assistance, advertising, laptop systems and training
This is one among the more lengthy and important disclosure Objects. In this Merchandise, the franchisor must allege:
- The services and products they can present to the franchisee ahead of and after opening.
- All advertising expenditures you may smartly be anticipated to assume.
- The average time it takes a franchisee to start.
- The acquire of laptop and similar electronics necessary to operate the industrial.
- A detailed description of the training you can anticipate to receive.
- The table of contents of the operations manuals.
Merchandise 12: Territory
The franchisor must allege whether it provides franchisees an “bizarre territory” within which to operate the industrial. With an bizarre territory, the franchisor promises that it may no longer enable another franchisee to locate within the territory and that it will also refrain from inserting a company-owned or affiliate-owned industrial there. This Merchandise must also allege whether you can relocate, and if that is so, what the criteria are to your pass and whether you have any rights to purchase additional devices.
Related: The Anatomy Of A Franchise Disclosure Memoir
Certainly one of the most more important disclosures in this piece is whether you may smartly be required to satisfy a quota or gain in another manner as a way of insuring either your legal to an bizarre territory, or your legal to continue in industrial at all. This Merchandise will also allege the franchisor’s reservation to itself of certain marketing and sales rights either within or start air any territory.
Merchandise 13: Trademarks
This piece must title each principal “Mark” (trade name, trademark, provider mark, provider name or logotype) to be licensed to you, and must state whether the franchisee is required to change or stop employ of a mark underneath any circumstances.
Merchandise 14: Patents, copyrights and proprietary information
The piece spells out the patents and copyrights held by the franchisor.
Merchandise 15: Obligation to participate within the actual operation of the franchise industrial
This piece discloses whether the franchisee must personally participate within the operation of the franchise. If there is not any such requirement, this piece must state whether the franchisor recommends such participation, whether the individual that’s handling day-to-day operations must total the franchisor’s training program and whether this individual must have an fairness pastime within the franchisee entity.
Related: 6 Inquiries to Ask Earlier than You Start up Your Franchise Search
Merchandise 16: Restrictions on what the franchisee may sell
In most cases, the franchisor will require the franchisee to sell handiest the merchandise and services and products that are part of the franchised industrial. This piece spells out those restrictions.
Merchandise 17: Renewal, termination, transfer and dispute resolution
Merchandise 17 contains a dismal-referencing table to the franchise agreement for 23 separate line objects. It’s assorted than Merchandise 9 in that it entails a concise statement of the lisp material of the particular franchise-agreement covenant as smartly as the location of the covenant within the agreement.
Related: 8 Steps to Finding the Factual Franchise
Merchandise 18: Public figures
This piece requires the franchisor to declare whether it uses a famous individual to endorse the franchise. If that’s the case, it must allege the compensation paid or promised to the individual, the individual’s involvement in management or management of the franchisor and the amount of the individual’s funding within the franchisor.
Merchandise 19: Financial performance representations
In layperson’s terms, a Financial Performance Representation (FPR) is any doc, chart, arithmetic calculation, math formula or other representation that would allow a potential franchisee to catch out what they may earn. The handiest way the franchisor or its sales staff or brokers can provide an FPR is if or no longer it’s stated in this Merchandise 19. If no such information is reveal in Merchandise 19, any claims made by the franchisor as to your potential earnings are in violation of the law.
Related: The 6 Simplest Financing Solutions for Franchising a Industry
Merchandise 20: Retail outlets and franchise information
This piece provides information regarding novel retail outlets within the franchise system. It covers outlet transfers — and the status of franchised and company-owned retail outlets — for the past three fiscal years, as smartly as projected openings for the next fiscal year. It must also present information regarding any reporting changes, any confidentiality clauses signed by franchisees for the duration of the past three fiscal years (“gag clauses”), and information about certain trademark franchisee associations.
Related: Know Earlier than You Aquire: These Are The Payments Associated With Purchasing and Operating a Franchise
Merchandise 21: Financial statements
The FDD must contain an reveal with the franchisor’s audited financial statements for the prior three fiscal years. If the franchisee has been start much less than three years, the FTC allows the franchisor to phase in audits. The franchisor is also required to gain a separate, audited financial statement for a company controlling 80 percent or more of the franchisor.
Merchandise 22: Contracts
This piece requires the franchisor to attach to the FDD a copy of all acquire contracts the franchisee will mark, in conjunction with the franchise agreement, leases, choices and purchase agreements.
Merchandise 23: Receipt
In this final piece, the franchisor is required to comprise as the last page of the FDD a acquire for the potential franchisee to mark to acknowledge receipt of the FDD.
