Breaking Down the FDD: Part 5

Breaking Down the FDD

SPECIAL SECTION: PART 5

Items 12 & 20: Territories and Units

By Nicole Micklich

Before you purchase a franchise, you should understand how much and what type of competition you might face from your franchisor and from other franchisees. The FDD provides information to help you investigate. You can find this information in Items 12 and 20 of the FDD.

ITEM 12: TERRITORY

Under Item 12 of the FDD, the franchisor must disclose whether the franchisee is given an exclusive territory. An exclusive territory is a geographic area granted to a franchisee, within which the franchisor promises not to open itself or allow another franchisee to open a unit selling the same or similar goods or services.

If the franchisor is not offering the franchisee an exclusive territory, then Item 12 must issue the following warning: “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets we own, or from other channels of distribution or competitive brands that we control.”

A franchisor that does not establish company-owned or franchised units within the franchisee’s territory does not have to include that warning, even if it reserves the right to make sales in the franchisee’s territory through alternate channels of distribution, like the Internet, or through competitive brands that it owns or controls. So whether or not the franchisor grants exclusive territories, the franchisor must provide detailed information about the territories it assigns and sales restrictions within the territories. That means that no matter what, Item 12 must disclose the franchisor’s rights to sell within the franchisee’s territory.

ITEM 12 SHOULD DISCLOSE:

• Whether the franchisor can solicit or accept orders from customers within the franchisee’s territory

• Whether the franchisor reserves the right to use alternate channels of distribution within the franchisee’s territory, like the Internet, telemarketing, or a catalog

• Whether the franchisor will pay the franchisee for soliciting or accepting orders within the franchisee’s territory

• Whether the franchisee is prohibited or restricted from soliciting or accepting orders from outside his or her territory, including whether the franchisee has the right to use alternate channels, like the Internet, telemarketing, or a catalog

• Plans the franchisor has to operate a competing franchise system offering goods or services similar to those offered in the system described by the FDD

ITEM 20: OUTLETS AND FRANCHISEE INFORMATION

Item 20 tells you about the ownership of other units. This item must include five tables that are supposed to capture changes in the ownership of units. The first table is a summary of the units in the system and shows the net changes in the total number of outlets, franchisor- and franchisee-owned, over the preceding three-year period. You should understand whether the total number of units in the system is increasing or decreasing and at what rate. And then, you need to figure out why and what that means for your chances of success.

Check in with current and former franchisees. If you buy a franchise, your contact information may be disclosed to other buyers when you leave the franchise system. Item 20 of the FDD should include a list with the contact information of all current franchisees in the system—or, if there are 100 or more franchisees in the state, the current franchisees where the prospect will do business. Item 20 also must disclose limited contact information for every former franchisee who was terminated, not renewed, or otherwise stopped doing business as a franchisee, during the most recent fiscal year. You should not hesitate to contact franchisees and ask questions as part of your analysis.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at 203-773-3824 or nmicklich@garciamilas.com