Breaking Down the FDD

Breaking Down the FDD

Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training

By Nicole Micklich

Item 11 is intended to provide an understanding of the franchisor’s obligations to his franchisees. For every one of the franchisor’s obligations disclosed in Item 11, the franchisor must include a citation to the specific section of the franchise agreement where the franchisor agrees to the obligation. Item 11 can be lengthy and complicated. This piece breaks down the topics Item 11 must cover: pre-opening assistance, post-opening assistance, optional assistance, advertising, computer requirements, and operating manuals.

One thing to keep in mind is that the franchisor is only bound by obligations set forth in Item 11—so if a potential obligation isn’t mentioned in Item 11, the franchisor doesn’t have to act on it. In fact, the FTC requires franchisors to begin their Item 11 disclosure with the following statement, in bold print: “Except as listed below, [franchisor] is not required to provide you with any assistance.”

PRE-OPENING ASSISTANCE

Pre-opening assistance might include site location assistance, site requirements, and lease negotiation. In some systems, pre-opening assistance includes initial training.

POST-OPENING ASSISTANCE

Training: Franchisors are required to disclose information about their training programs including information about the staff who provide the training. Some training disclosures must be summarized in a table that must include:

• a list of the subject matter of the training

• the hours of classroom training on each subject

• the hours of on-the-job training

• the location of the training

In addition to the table, franchisors must also disclose who is required to attend training, for example, whether a franchisee’s store manager must undergo certain training, as well as who pays for travel and living expenses during training, and whether refresher training is required.

Advertising:

The franchisor is required to disclose information regarding advertising assistance including:

• whether the franchisor is required to conduct advertising

• the media used for advertising, such as radio, television, Internet

• the source of the advertising

• the geographic scope of the advertising

• whether or not franchisees must contribute to an advertising fund

• whether and how much franchisees are required to spend on local advertising

• whether and how advertising councils or co-ops operate in the franchise system

Advertising Funds:

If franchisees are required to contribute to an advertising fund, the FTC rule requires franchisors to disclose:

• who contributes to the fund

• whether other franchisees and franchisorowned units contribute on the same basis

• who administers the fund

• whether the fund is audited

• whether the financial statements of the fund are available for review

• whether the franchisees receive periodic accountings of fund expenditures

• the percentage of the fund used primarily to solicit new franchise sales

OPTIONAL ASSISTANCE

If a franchisor provides pre- or post-opening assistance other than what the franchise agreement requires, it can disclose that optional assistance in Item 11. The franchisor should list the optional assistance separately and clearly identify that it is not required by the franchise agreement.

COMPUTER REQUIREMENTS

In Item 11, franchisors are also required to generally describe computer requirements for franchisees. These might include the franchisor’s requirement that franchisees purchase specific software, from specific approved suppliers. The disclosure should also explain whether the franchisor will have independent access to the franchisee’s computer system or electronic cash register and whether the franchisor has the right to conduct audits of accounting records maintained electronically.

OPERATING MANUAL

Franchisees will receive a system’s operating manual after the purchase is complete. Here, Item 11 requires that franchisors disclose the manual’s table of contents, unless the franchisor offers prospective franchisees the opportunity to review the operating manual prior to buying the franchise.

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