Breaking Down the FDD-Part 3

Breaking Down the FDD

Items 9 & 15: Franchisee’s Obligations

By Nicole Micklich

Last month’s edition opened with the idea that buying into a franchise system means accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Those rules are set out in the FDD and the franchise agreement. They become binding obligations of the franchisee when the franchise agreement is signed.

Item 9 of the FDD should contain a disclosure of all the “principal obligations of the franchisee under the franchise and other agreements” once the franchise agreement is executed. Item 15 must describe how much direct involvement the franchisee is required to have in the operation of the franchise business.

ITEM 9: FRANCHISEE’S OBLIGATIONS

Item 9 must provide prospective franchisees with detailed directions toward where to find the franchisee’s obligations in the franchise agreement. Franchisors must follow the FTC Rule and create a detailed table that refers to the sections in the franchise agreement that the franchisee should read to understand the franchisee’s specific obligations. The table should lead the franchisee to detailed information about the franchisee’s obligations.

The table must list 25 obligations in a form mandated by the FTC Rule. The top of it may look something like this:

If an obligation is contained in an ancillary agreement, the franchisor should direct prospects to the specific provision of the ancillary agreement. An ancillary agreement might be a covenant not to compete, an obligation that should be included in the table. Obligations imposed on the franchisee that are not listed in the FTC Rule must be included, as well, under the heading “Other.”

The table should include where to find requirements about transfers and renewals. Even though at the start of a relationship it might be hard to think about the end, prospective franchisees are about to make an enormous investment, they must consider exit options to protect that investment.

Prospective franchisees should use the table and review the contract provisions detailing the franchisee’s obligations. If a prospective franchisee does not understand those provisions, it is important to develop that understanding before signing the franchise agreement. To learn more, ask a franchise attorney.

ITEM 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS

Item 15 explains the role that the franchisee must have in the business operation. For example, some franchisors allow the franchisee to be an absentee owner, someone who owns the franchise without taking an active role in its management. Most though require the franchisee to have some active role in the franchised business. Item 15 should explain how much involvement the franchisor requires, and whether the franchisor requires the franchisee to provide on-site supervision of the business. Item 15 is especially important for prospective franchisees who intend to continue to work in a current job while starting-up their new franchised business

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