SPECIAL SECTION: PART 2
Breaking Down
the FDD
Item 8: Restrictions on Sources of Products and Services
By Nicole Micklich
P
art of buying into a franchise system is accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Item 8 of the FDD discusses suppliers and lays out sourcing restrictions for products and materials, which is especially important in food-based concepts. Item 8 can be very revealing, so it’s important to understand. The franchisor may negotiate arrangements with approved vendors, and these arrangements may result in some franchisees paying more for certain items than if they bought the same items elsewhere. For example, a franchisor may designate only one approved supplier for cleaning products. The franchisor’s arrangement with the supplier results in advertising contributions to the franchisor, which the franchisor can allocate to any market. This arrangement obviously works well for the franchisor—but it may have seemingly little benefit for a franchisee. A franchisee, in a market that does not receive those advertising dollars, might prefer a brand of cleanser that costs half the price of the approved brand. But using a different product can put the franchisee out of compliance. And, as a franchisee, you stand to benefit from the brand awareness developed by the franchisor. ITEM 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL This item should disclose any restrictions or conditions relating to what a franchisee sells. It may say, “We require you to offer and sell only those goods and services that we have approved. You must offer all goods and services we designate as required for all franchisees.” This means every franchisee must offer all the required products or services. On the other hand, Item 16 may reveal that franchisees in certain regions may offer different products, because regional preferences may vary.
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