MERGERS & ACQUISITIONS
Buying a franchise is not like starting an independent business. With a franchise, you are buying a support system and the rights to operate a business that has been designed by someone else. Someone who has developed an expertise in the business and who has, most likely, tackled and solved the problems that people generally encounter in the industry you are thinking of entering. You are buying the security of a track record, a brand and operating, reporting and management systems. With a franchise, you are purchasing a head start in the industry and a foothold from which to begin your climb.
It’s important not to be misled, though. Even though a franchise can give you many advantages over starting a business yourself, it’s not going to guarantee you success. Each and every individual business—franchise or not—has one major difference. That difference is YOU. And with the statistics in your favor, franchising can be the method of owning a business that can allow you to succeed.
How Franchising Works
Franchising is not an industry. It is a method of distributing products and services that has been adopted by companies in more than 70 different industries. While often associated with highly recognizable restaurant brands, franchising is used by real estate, photo development, auto repair and many other businesses to expand. Franchising is an excellent way to be in business for yourself, but not by yourself. The franchise agreement spells out the mutual obligations and responsibilities between the franchisor and franchisee. The franchisor developed the operating system and owns the right to it, along with the name and trademark. The franchisee invests in a license to use the intellectual property and business plan of the franchise. Although some systems differ, most require the franchisee to make ongoing royalty payments in return for an ongoing license to use the trademark and the franchise system’s most valuable assets. Thus, the intellectual property, operating plan and other proprietary information are protected in order to ensure the highest possible return on the franchisee’s investment in the brand. Franchising is successful because consumers rely on the assurance of consistency, quality, reputation and value. In franchising, predictability is a good thing - - the public knows what it is going to get at a hotel or motel along the highway, or that it can count on a particular meal experience at any restaurant in a chain. Protection of the brand and the uniform delivery of a product or system are the foundations of the franchisee’s investment and the keys to success for a franchise system.
The mutually beneficial relationship that exists between franchisors and franchisees makes franchising unique in the world of business. It provides entrepreneurs with an affordable means of accelerating expansion, achieving development goals more quickly than might otherwise be the case and with far less risk. Similarly, franchisees have a head start because of the support provided by the franchise system. Franchising is, literally, being in business for yourself but not by yourself. Whether it's accounting and financing, advertising and public relations, personnel management, purchasing or inventory control, franchisors are there to provide "hands on," one-to-one assistance. While franchising does provide opportunities, it does not create miracles. Franchisees combine knowledge and resources with entrepreneurial drive and spirit to form a business relationship unique to franchising. Franchising is a field of expanding economic opportunity in which each and every person can play a part based on talent, initiative, and dedication.
Strategic Growth / Strategic Divestiture
100% SUCCESS RATE
WE WILL DEVELOP AND BUILD YOUR FRANCHISE BUSINESS AND THEN SELL YOUR EQUITY TO OUR PRE-QUALIFIED INVESTORS OR OBTAIN INVESTMENT CAPITAL TO EXPAND YOUR OPPORTUNITIES
United
States Franchise M&A Associates is a premier Mergers & Acquisitions firm
serving middle market companies. We proactively represent visionary franchise
business owners to the ever changing marketplace of buyers and sellers.
Whether you are interested in Growth through Acquisition or Strategic Divesture
- our mission is to achieve your goals.
Since 2001, USFA skilled professionals, led by a team of successful former
franchise business owners, have developed and perfected M&A methodologies
that move the market to your advantage:
Our
franchised agencies are
strategic assets with a sales price multiple of 3 to 5 times net income and
makes a perfect investment for your future goals.
STRATEGIC
ACQUISITION
We specialize in buy-side clients
STRATEGIC DIVESTITURE
We work with sell-side clients
Technology and Franchising
There are several trends related to the use of technology in franchising today. 1) many franchisors use the internet to communicate with franchise owners and suppliers through secure extranets in order to share critical information, facilitate discussion among the franchise network, post operations manuals and updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales reports automatically and without the need for more labor-intensive data entry. 2) franchisors use the internet to advertise their network to customers. 3) some franchisors use the internet to engage in business-to-consumer (B2C) e-commerce, often with the involvement of franchisees. 4) many prospective franchisees glean information and make contact with franchisors using the internet. Some franchisors now report that they get more sales leads from the internet than from any other source. 5) and finally, franchisors make extensive use of technology in offering their services directly to consumers -- such as networks of businesses that offer website design and web hosting. The prospects for, and reality of, involving technology in franchising make this a very exciting time to own a franchised business.
Franchising is growing at record levels each year. Currently, there are over 1.5 million franchised outlets, accounting for approximately one-third of all retail sales. Statistics show that 90% of franchise owners succeed in their businesses. So even though it does not guarantee success, statistics reveal that fewer than 10% of new franchise businesses fail. Compare that to the high failure rate of new businesses overall each year in the United States and you have a strong case for franchising.
Data from the U.S. Department of Commerce illustrate the business success rate over a ten-year period of Individual New Start-up Enterprises versus Franchise Businesses.
FDD RULE
Section I--Proposed Rule
PART 436--DISCLOSURE REQUIREMENTS AND PROHIBITIONS CONCERNING FRANCHISING
Section 436.1 Definitions.
Obligations of Franchisors and Other Franchise Sellers
436.2 The obligation to furnish documents.
The Contents of a Disclosure Document
436.3 Cover page.
436.4 Table of contents.
436.5 Disclosure items.
Instructions:
436.6 Instructions for preparing disclosure documents.
436.7 Instructions for electronic disclosure documents.
436.8 Instructions for updating disclosures.
Other Provisions
436.9 Exemptions.
436.10 Additional prohibitions.
436.11 Other laws, rules, orders.
436.12 Severability.
Sec. 436.1 Definitions.
Unless stated otherwise, the following definitions shall apply throughout this
rule:
(a) Action includes complaints, cross claims, counterclaims, and third party
complaints in a judicial proceeding, and their equivalents in an administrative
action or arbitration proceeding.
(b) Affiliate means an entity controlled by, controlling, or under common
control with the franchisor.
(c) Disclose means to state all material facts accurately, clearly, concisely,
and legibly in plain English.
(d) Financial performance representation means any oral, written, or visual
representation to a prospective franchisee, including a representation
disseminated in the general media and Internet, that states or suggests a
specific level or range of potential or actual sales, income, gross profits, or
net profits. A chart, table, or mathematical calculation that demonstrates
possible results based upon a combination of variables is a financial
performance representation.
(e) Fiscal year refers to the franchisor's fiscal year.
(f) Fractional franchise means a franchise relationship, which when the
relationship is created:
(1) The franchisee or any of the franchisee's current directors or officers has
more than two years of experience in the same type of business and
(2) The parties reasonably anticipate that the sales arising from the
relationship will not exceed more than twenty percent of the franchisee's total
dollar volume in sales during the first year of operation.
(g) Franchise means any continuing commercial relationship or arrangement,
whatever it may be called, in which the terms of the offer or contract specify,
or the franchise seller represents, orally or in writing, that:
(1) The franchisee obtains the right to operate a business or offer, sell, or
distribute goods, commodities, or services that are identified or associated
with the franchisor's trademark;
(2) The franchisor Exerts or has authority to exert a significant degree of
continuing control over the franchisee's method of operation, including but not
limited to, the franchisee's business organization, promotional activities,
management, or marketing plan or Provides significant assistance in the
franchisee's method of operation (e.g., the franchisee's business organization,
promotional activities, management, or marketing plan), extending beyond the
start of the business operation. Promotional assistance alone, however, will not
constitute ``significant'' assistance in the absence of other forms of
assistance and
(3) As a condition of obtaining or commencing operation of the business, the
franchisee is required by contract or by practical necessity to make a payment,
or a commitment to pay, to the franchisor or a person affiliated with the
franchisor.
(h) Franchise seller means a person that offers for sale, sells, or arranges for
the sale of an interest in a franchise. It includes the franchisor and its
employees, representatives, agents, and third party brokers. It does not include
franchisees who sell only their own outlets. Franchisee means any person who is
granted an interest in a franchise. Franchisor means any person who grants an
interest in a franchise and participates in the franchise relationship.
(k) Gag clause means any contractual provision entered into by a franchisor and
a current or former franchisee that prohibits or restricts that franchisee from
discussing his or her personal experience as a franchisee within the
franchisor's system. It does not include confidentiality agreements that protect
franchisors' trademarks or other proprietary information.
(l) Internet means all communications between computers and between computers
and television, telephone, facsimile, and similar communications devices. It
includes the World Wide Web, proprietary online services, E-mail, newsgroups,
and electronic bulletin boards.
(m) Leased department means an arrangement whereby a retailer licenses or
otherwise permits an independent seller to conduct business from the retailer's
premises.
(n) Material, material fact, and material change includes any fact,
circumstance, or set of conditions that has a substantial likelihood of
influencing a reasonable franchisee or prospective franchisee in making a
significant decision.
(o) Officer means any individual with significant management responsibility for
the marketing and or servicing of franchises, such as the chief executive and
chief operating officers, and the financial, franchise marketing, training, and
service officers. It also includes a de facto officer, namely an individual with
significant management responsibility for the marketing and/or servicing of
franchises whose title does not reflect the nature of the position.
(p) Person means any individual, group, association, limited or general
partnership, corporation, or any other business entity.
(q) Plain English means the organization of information and language usage
understandable by a person unfamiliar with the franchise business. It
incorporates the following six principles of clear writing: Short sentences;
definite, concrete, everyday language; active voice; tabular presentation of
information; no legal jargon or highly technical business terms; and no multiple
negatives.
(r) Predecessor means a person from whom the franchisor acquired, directly or
indirectly, the major portion of the franchisor's assets or from whom the
franchisor obtained a license to use the trademark or trade secrets in the
franchise operation.
(s) Principal business address means the address of the franchisor's home office
in the United States. A principal business address cannot be a post office box
or private mail drop.
(t) Prospective franchisee means any person (including any agent,
representative, or employee) who approaches or is approached by a franchise
seller to discuss the possible establishment of a franchise relationship.
(u) Required payment means all consideration that the franchisee must pay to the
franchisor or its affiliate, either by contract or by practical necessity, as a
condition of obtaining or commencing operation of the franchise.
(v) Sale of a franchise includes an agreement whereby a person obtains a
franchise or interest in a franchise for value by purchase, license, or
otherwise. It does not include extending or renewing an existing franchise
agreement where there is no interruption in the franchisee's operation of the
business, unless the new agreement contains terms and conditions that differ
materially from the original agreement.
(w) Signature means a person's affirmative steps to authenticate his or her
identity. It includes a person's written signature, as well as a person's use of
security codes, passwords, digital signatures, and similar devices.
(x) Trademark includes trademarks, service marks, names, logos, and other
commercial symbols.
(y) Written means any information in printed form or in any form capable of
being preserved in tangible form and read. It includes: type-set, word
processed, or handwritten documents; documents on computer disk or CD Rom;
documents sent via E-mail; or documents posted on the Internet. It does not
include mere oral statements.
Obligations of Franchisors and Other Franchise Sellers
Sec. 436.2 The obligation to furnish documents.
In connection with the offer or sale of a franchise to be located in the United
States of America, its territories, or possessions, unless the transaction is
exempted under the provisions of section 436.9, it is an unfair or deceptive act
or practice in violation of section 5 of the Federal Trade Commission Act:
(a) For any franchise seller to fail to furnish a prospective franchisee with
the following documents within the following time frames. The obligations set
forth in this subsection are satisfied if either the franchisor or other
franchise seller furnishes the required documents to the prospective franchisee:
(1) A current disclosure document. A copy of the franchisor's current disclosure
document, as described in sections 436.3-436.8, at least 14 days before the
prospective franchisee signs a binding agreement or pays any fee in connection
with the proposed franchise sale; and
(2) Completed franchise agreement. A copy of the completed franchise agreement,
and any related agreements, at least five days before the prospective franchisee
signs the franchise agreement.
(b) For purposes of this section, a franchise seller will be considered to have
furnished the documents by the required date if a copy of the document either a
paper copy or, with the consent of the prospective franchisee, an electronic
copy has been delivered to the prospective franchisee by that date, or if a copy
has been sent to the address specified by the prospective franchisee by first
class mail at least three days prior to the specified date. Documents shall also
be considered to have been furnished by the required date if a copy has been
sent by electronic mail or if directions for accessing the document on the
Internet have been provided to the prospective franchise by that date.
(c) For any franchisor to fail to include the information and follow the
instructions required by sections 436.3-436.8 in preparing the disclosure
document to be furnished to prospective franchisees. Any other franchise seller
shall be liable for violations of these sections if they knew or should have
known of the violation.
FRANCHISE DISCLOSURE DOCUMENT
Section 436.3 Cover page.
Begin the disclosure document with a cover page that consists of the following:
(a) The title ``FRANCHISE DISCLOSURE DOCUMENT'' in boldface type.
(b) The franchisor's name, type of business organization, principal business
address, telephone number, and, if applicable, E-mail address and primary
Internet home page address.
(c) A sample of the primary business trademark under which the franchisee will
conduct its business.
(d) A brief description of the franchised business.
(e) The total amounts in Item 5 (Initial Franchisee Fee) and Item 7 (Estimated
Initial Investment) of the disclosure document.
(f) The issuance date.
(g) The following statements in the order and form shown below:
(1) This disclosure document summarizes certain provisions of the franchise
agreement and other information in plain English. Read this disclosure document
and all agreements carefully. You must receive this disclosure document at least
14 days before you sign a binding agreement or pay any fee. You must also
receive completed copies of all contracts at least five days before you sign
them.
(2) If the franchisor furnishes an electronic version of its disclosure
document, also insert the following: You may have elected to receive an
electronic version of your disclosure document. If so, you may wish to print or
download the disclosure document for future reference. You have the right to
receive a paper copy of the disclosure document up until the time of sale. To
obtain a paper copy, contact name at address and telephone number.
(3) Buying a franchise is a complicated investment. The information contained in
this disclosure document can help you make up your mind. Note, however, that the
Federal Trade Commission (FTC) has not checked the information and does not know
if it is correct. Information comparing franchisors is available. Call your
State agency or your
public library for sources of information. Additional information on
franchising, such as ``A Consumer's Guide to Buying a Franchise,'' is available
from the FTC. You can contact the FTC in Washington, D.C., or visit the FTC's
home page at www.ftc.gov for further information. In addition, there may be laws
on franchising in your State. Ask your
State agencies about them.
(4) You should also know that the terms and conditions of your contract will
govern your franchise relationship. While the disclosure document includes some
information about your contract, don't rely on it alone to understand your
contract. Read all of your contract carefully. Show your contract and this
disclosure document to an advisor, like a lawyer or an accountant.
(5) Federal Trade Commission, Washington, DC 20580.
(h) Franchisors may include additional disclosures on the cover page, or on a
separate cover page, to comply with any applicable State presale disclosure
laws.
Section 436.4 Table of contents.
Include the following table of contents. State the page where each disclosure
Item begins. List all exhibits by letter, following the example shown below.
Table of Contents
1. The Franchisor, its Parent, Predecessors, and Affiliates
2. Business Experience
3. Litigation
4. Bankruptcy
5. Initial Franchise Fee
6. Other Fees
7. Estimated Initial Investment
8. Restrictions on Sources of Products and Services
9. Franchisee's Obligations
10. Financing
11. Franchisor's Assistance, Advertising, Computer Systems, and Training
12. Territory
13. Trademarks
14. Patents, Copyrights, and Proprietary Information
15. Obligation to Participate in the Actual Operation of the Franchise Business
16. Restrictions on What the Franchisee May Sell
17. Renewal, Termination, Transfer, and Dispute Resolution
18. Public Figures
19. Financial Performance Representations
20. Outlets and Franchisee Information
21. Financial Statements
22. Contracts
23. Receipt
FRANCHISE DISCLOSURE ITEM 1
Section 436.5 Disclosure Items 1.
ITEM 1: The Franchisor, Its Parents, Predecessors, and Affiliates.
(1) Disclose the name of the franchisor. Also disclose the names of any parent and affiliates of the franchisor and the relationship with the franchisor. For purposes of this paragraph the term``affiliate'' means an entity controlled by, controlling, or under common control with the franchisor, that offers franchises in any line of business or is providing products or services to the franchisees of the franchisor.
(2) Disclose the name of any predecessors during the 10 year period immediately before the close of the franchisor's most recent fiscal year.
(3) Disclose the name under which the franchisor does or intends to do business.
(4) Disclose the principal business address of the franchisor, its parent, predecessors, and affiliates, and the franchisor's agent for service of process.
(5) Disclose the type of business organization used by the franchisor (e.g., corporation, partnership), and the State in which it was organized.
(6) Disclose the following
information about the nature of the franchisor's business and the franchises to
be offered:
(i) Whether the franchisor operates businesses of the type being franchised;
(ii) The franchisor's other business activities;
(iii) The business to be conducted by the franchisee;
(iv) The general market for the product or service to be offered by the
franchisee. In describing the general market, consider factors such as whether
the market is developed or developing, whether the goods will be sold primarily
to a certain group, and whether sales are seasonal;
(v) In general terms, any laws or regulations specific to the industry in which
the franchise business operates; Only laws pertaining specifically to the
industry sector of the franchised business, and not businesses generally, must
be disclosed in this Item. For example, a real estate brokerage franchisor
should disclose the existence of broker licensing laws; an optical products
franchisor should disclose the existence of applicable optometrist/optician
staffing regulations and licensing requirements; a lawn care franchisor should
disclose that certain environmental laws regulating pesticide application to
residential lawns will require that franchisees post notices on treated lawns.
It is not necessary to include laws or regulations that apply to businesses
generally, such as general business licensing laws, tax regulations, or labor
laws.
(vi) A general description of the competition.
(7) Disclose the prior business
experience of the franchisor, its parent, predecessors, and affiliates,
including:
(i) The length of time each has conducted the type of business to be operated by
the franchisee;
(ii) The length of time each has offered franchises providing the type of
business to be operated by the franchisee; and
(iii) Whether each has offered franchises in other lines of business, including:
(A) A description of each other line of business;
(B) The number of franchises sold in each other line of business; and
(C) The length of time offering each other line of business.
FRANCHISE DISCLOSURE ITEM 2
ITEM 2: Business Experience. Disclose the position and name of the directors, trustees, general partners, officers, and subfranchisors of the franchisor or any parent who will have management responsibility relating to the offered franchises. List all franchise brokers. For each person listed, state the principal positions and employers during the past five years, including each position's beginning date, ending date, and location.
FRANCHISE DISCLOSURE ITEM 3
ITEM 3: Litigation.
(1) Disclose whether the
franchisor, its parent, predecessor, a person identified in paragraph (b) of
this section, or an affiliate who offers franchises under the franchisor's
principal trademark:
(i) Has pending against that person:
(A) An administrative, criminal, or material civil action alleging a violation
of a franchise, antitrust, or securities law, or alleging fraud, unfair or
deceptive practices, or comparable allegations; or
(B) Civil actions, other than ordinary routine litigation incidental to the
business, which are significant in the context of the number of franchisees and
the size, nature, or financial condition of the franchise system or its business
operations.
(ii) Is a party to any pending material civil action involving the franchise
relationship. For purposes of this paragraph, ``franchise relationship'' means
contractual obligations between the franchisor and franchisee directly relating
to the operation of the franchised
business (e.g., royalty payment and training obligations). It does not include
suits involving third-parties such as suppliers or indemnification for tort
liability.
(iii) Has during the 10 year period immediately before the disclosure document's
issuance date:
(A) Been convicted of a felony or pleaded nolo contendere to a felony charge;
(B) Been held liable in a civil action by final judgment. ``Held liable'' means
that, as a result of claims or counterclaims, the franchisor must pay money or
other consideration, must reduce an indebtedness by the amount of an award,
cannot enforce its rights, or
must take action adverse to its interests; or
(C) Been a defendant in a material action involving an alleged violation of a
franchise, antitrust, or securities law, or involving allegations of fraud,
unfair or deceptive practices, or comparable allegations.
\2\ Franchisors are not required to disclose actions that were dismissed by
final judgment without liability or entry of an adverse order. However,
franchisors must disclose dismissal of a material action in connection with a
settlement.
(iv) Is subject to a currently effective injunctive or restrictive order or
decree resulting from a pending or concluded action brought by a public agency
and relating to the franchise or to a Federal, State, or Canadian franchise,
securities, antitrust, trade regulation, or trade practice law.
(2) For each action identified in
paragraph (c)(1) of this section, state the title, case number or citation, the
initial filing date, the names of the parties, and the forum. State the
relationship of the opposing party to the franchisor (e.g., competitor,
supplier, lessor,
franchisee, former franchisee, or class of franchisees). Summarize the legal and
factual nature of each claim in the action, the relief sought or obtained, and
any conclusions of law or fact. In addition:
\3\ Franchisors may include a summary opinion of counsel concerning any action
if a consent to use the summary opinion is included as part of the disclosure
document.
(i) For pending actions, state the status of the action;
(ii) For prior actions, state the date when the judgment was entered and any
damages and/or settlement terms.
\4\ If a settlement agreement must be disclosed in this Item, all material
settlement terms must be disclosed, whether or not the agreement is
confidential. Because of difficulties in retrieving information and/or obtaining
releases from older confidentiality agreements, franchisors are not required to
disclose the settlement terms of settlements entered before April 15, 1993,
consistent with the policy adopted by the North American Securities
Administrators Association's Uniform Franchise Offering Circular Guidelines.
(iii) For injunctive or restrictive orders, state the nature, terms, and
conditions of the order or decree; and
(iv) For convictions or pleas, state the crime or violation, the date of
conviction, and the sentence or penalty imposed.
FRANCHISE DISCLOSURE ITEM 4
ITEM 4: Bankruptcy.
(1) Disclose whether the
franchisor, its parent, predecessor, a person identified in paragraph (b) of
this section or an affiliate who offers franchises under the franchisor's
principal trademark has, during the 10 year period immediately before the date
of this disclosure document:
(i) Filed as debtor or had filed against it a petition under the U.S. Bankruptcy
Code.
(ii) Obtained a discharge of its debts under the Bankruptcy Code; or
(iii) Been a principal officer of a company or a general partner in a
partnership that either filed as a debtor (or had filed against it) a petition
under the Bankruptcy Code or that obtained a discharge of its debts under the
Bankruptcy Code while or within one year after the officer or general partner
held the position in the company.
(2) For each bankruptcy:
(i) State the name, address, and principal business of the debtor;
(ii) If the debtor is not the franchisor, state the relationship of the debtor
to the franchisor (e.g., affiliate, officer); and
(iii) State the date of the original filing. Identify the bankruptcy court, and
the case name and number. If applicable, state the debtor's discharge date,
including discharges under Chapter 7 and confirmation of any plans of
reorganization under Chapters 11 and 13 of
the Bankruptcy Code.
(3) Disclose cases, actions, and other proceedings under the laws of foreign nations relating to bankruptcy, as if they took place under the Bankruptcy Code.
FRANCHISE DISCLOSURE ITEM 5
ITEM 5: Initial Franchise Fee.
Disclose the initial franchise fee and the conditions under which this fee is refundable. If the initial fee is not uniform, disclose the range or the formula used to calculate the initial fees paid in the fiscal year before the issuance date and the factors that determined the amount. For purposes of this Item, ``initial fee'' means all fees and payments for services or goods received from the franchisor before the franchisee's business opens, whether payable in lump sum or installments.
FRANCHISE DISCLOSURE ITEM 6
Item 6: Recurring or Occasional Fees.
Disclose, in the tabular form
shown below, any recurring or occasional fees that the franchisee must pay to
the franchisor or its affiliates, or that the franchisor or its affiliates
impose or collect in whole or in part on behalf of a third party. Include any
formula used to compute the fees. If fees may increase, disclose the formula
that determines the increase or the maximum amount of the increase. For example,
a percentage of gross sales is acceptable if the franchisor defines the term
``gross sales.''
----------------------------------------------------------------------------------------------------------------
(1) Type of fee (2) Amount (3) Due date (4) Remarks
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
(1) In column (1), disclose the type of fee (e.g., royalties, and fees for lease
negotiations, construction, remodeling, additional training or assistance,
advertising, advertising cooperatives, purchasing cooperatives, audits,
accounting, inventory, transfers, and renewals).
(2) In column (2), disclose the amount of each fee.
(3) In column (3), disclose the applicable due date for recurring fees.
(4) In column (4), include any relevant remarks, definitions, or caveats that
elaborate on the information in the table. If remarks are lengthy, franchisors
may use footnotes instead of the remarks column. If applicable, include the
following information in the remarks column or in a footnote:
(i) If the fees are payable only to the franchisor;
(ii) If the fees are imposed and collected by the franchisor;
(iii) The terms and conditions under which any fee is refundable; and
(iv) The voting power of franchisor-owned outlets on any fees imposed by
cooperatives. If franchisor-owned outlets have controlling voting power,
disclose the maximum and minimum fees that may be imposed.
FRANCHISE DISCLOSURE ITEM 7
ITEM 7: Estimated Initial Investment.
Disclose, in the tabular form
shown below, the franchisee's estimated initial investment. Title the table
``Your Estimated Initial Investment For The First reasonable initial phase
Months.'' A reasonable initial phase is at least three months or a reasonable
period for the industry. Franchisors may include additional expenditure tables
to show expenditure variations caused by differences such as in site location
and premises size.
Your Estimated Initial Investment for the First [reasonable initial phase]
Months
----------------------------------------------------------------------------------------------------------------
(1)Type of expenditure (2)Amount (3)Method of payment (4)When due (5)To whom
paid
----------------------------------------------------------------------------------------------------------------
Total...........................
----------------------------------------------------------------------------------------------------------------
(1) In column (1), disclose each type of expense, beginning with pre opening
expenses. Include the following expenses, if applicable. Use footnotes to
comment on expenditures.
(i) The initial franchise fee.
(ii) Training expenses.
(iii) Real property, whether purchased or leased.
(iv) Equipment, fixtures, other fixed assets, construction, remodeling,
leasehold improvements, and decorating costs, whether purchased or leased.
(v) Inventory required to begin operation.
(vi) Security deposits, utility deposits, business licenses, and other prepaid
expenses.
(vii) List separately and by name any other specific payment (e.g., additional
training, travel, or advertising expenses).
(viii) Include an additional expense category named ``other payments'' for any
other miscellaneous expenses that the franchisee will incur before operations
begin and during the initial phase.
(2) In column (2), state the amount of the payment. If the specific amount is
not ascertainable, use a low high range based on the franchisor's current
experience. If real property costs cannot be estimated in a low high range,
disclose the approximate size of the property and building, and describe the
probable location of the building (e.g., strip shopping center, mall, downtown,
rural, or highway).
(3) In column (3), disclose the method of payment.
(4) In column (4), disclose the applicable due date.
(5) In column (5), disclose to whom payment will be made.
(6) Total the initial investment, incorporating ranges of fees, if used.
(7) Disclose in a footnote:
(i) The conditions under which each payment is refundable; and
(ii) If the franchisor or an affiliate finances part of the initial investment,
the amount that it will finance, the required down payment, the annual
percentage rate of interest, rate factors, and the estimated loan repayments.
Franchisors may refer the reader to Item 10 for additional details.
FRANCHISE DISCLOSURE ITEM 8
ITEM 8: Restrictions on Sources of Products and Services
Disclose the franchisee's obligations to
purchase or lease goods, services, supplies, fixtures, equipment, inventory,
computer hardware and software, real estate, or comparable items related to
establishing or operating the franchised business either from the franchisor,
its designee, or suppliers approved by the franchisor, or under the franchisor's
specifications. Include obligations to purchase imposed by the franchisor's
written agreement or by the franchisor's practice.4
Franchisors may include the reason for the requirement. Franchisors need not disclose in this Item the purchase or lease of goods or services provided as part of the franchise without a separate charge (such as initial training, if the cost is included in the franchise fee). Describe such fees in Item 5 of this section. Do not disclose fees already described in §436.5(f) of this part.
(1) The good or service required to be purchased or leased.
(2) Whether the franchisor or its affiliates are approved suppliers or the only approved suppliers of that good or service.
(3) Any supplier in which an officer of the franchisor owns an interest.
(4) How the franchisor grants and revokes approval of alternative suppliers, including:
(i) Whether the franchisor's criteria for approving suppliers are available to franchisees.
(ii) Whether the franchisor permits franchisees to contract with alternative suppliers who meet the franchisor's criteria.
(iii) Any fees and procedures to secure approval to purchase from alternative suppliers.
(iv) The time period in which the franchisee will be notified of approval or disapproval.
(v) How approvals are revoked.
(5) Whether the franchisor issues specifications and standards to franchisees, subfranchisees, or approved suppliers. If so, describe how the franchisor issues and modifies specifications.
(6) Whether the franchisor or its affiliates will or may derive revenue or other material consideration from required purchases or leases by franchisees. If so, describe the precise basis by which the franchisor or its affiliates will or may derive that consideration by stating:
(i) The franchisor's total revenue.
Take figures from the franchisor's most recent annual audited financial statement required in §436.5(u) of this part. If audited statements are not yet required, or if the entity deriving the income is an affiliate, disclose the sources of information used in computing revenues.
(ii) The franchisor's revenues from all required purchases and leases of products and services.
(iii) The percentage of the franchisor's total revenues that are from required purchases or leases.
(iv) If the franchisor's affiliates also sell or lease products or services to franchisees, the affiliates' revenues from those sales or leases.
(7) The estimated proportion of these required purchases and leases by the franchisee to all purchases and leases by the franchisee of goods and services in establishing and operating the franchised businesses.
(8) If a designated supplier will make payments to the franchisor from franchisee purchases, disclose the basis for the payment (for example, specify a percentage or a flat amount). For purposes of this disclosure, a “payment” includes the sale of similar goods or services to the franchisor at a lower price than to franchisees.
(9) The existence of purchasing or distribution cooperatives.
(10) Whether the franchisor negotiates purchase arrangements with suppliers, including price terms, for the benefit of franchisees.
(11) Whether the franchisor provides material benefits (for example, renewal or granting additional franchises) to a franchisee based on a franchisee's purchase of particular products or services or use of particular suppliers.
(i) Item 9 : Franchisee's Obligations .
Disclose, in the following tabular form, a list of the franchisee's principal
obligations. State the title “
FRANCHISE DISCLOSURE ITEM 9
ITEM 9: Franchisee's Obligations.
Disclose, in the tabular form shown below, a list of the franchisees' principal obligations. Cross reference each listed obligation with any applicable franchise agreement and disclosure document section(s). Respond to each listed obligation. If a particular obligation is not applicable, state ``Not Applicable.'' Include additional obligations, as is warranted. This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this disclosure document.
----------------------------------------------------------------------------------------------------------------
Obligation Section in agreement Disclosure document item
----------------------------------------------------------------------------------------------------------------
a. Site selection and ...................................
..........................................
acquisition/lease
b. Pre-opening purchases/leases ...................................
..........................................
c. Site development and other ...................................
..........................................
pre-opening requirements
d. Initial and ongoing training ...................................
..........................................
e. Opening ...................................
..........................................
f. Fees ...................................
..........................................
g. Compliance with standards ...................................
..........................................
and policies/operating manual
h. Trademarks and proprietary ...................................
..........................................
information
i. Restrictions on products/ ...................................
..........................................
services offered
j. Warranty and customer ...................................
..........................................
service requirements
k. Territorial development and ...................................
..........................................
sales quotas
l. Ongoing product/service ...................................
..........................................
purchases
m. Maintenance, appearance, and ...................................
..........................................
remodeling requirements
n. Insurance ...................................
..........................................
o. Advertising ...................................
..........................................
p. Indemnification ...................................
..........................................
q. Owner's participation/ ...................................
..........................................
management/staffing
r. Records and reports ...................................
..........................................
s. Inspections and audits ...................................
..........................................
t. Transfer ...................................
..........................................
u. Renewal ...................................
..........................................
v. Post-termination obligations ...................................
..........................................
w. Non-competition covenants ...................................
..........................................
x. Dispute resolution ...................................
..........................................
y. Other (describe)
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FRANCHISE DISCLOSURE ITEM 10
ITEM 10: Financing.
(1) Disclose the terms and
conditions of each financing arrangement, including leases and installment
contracts, that the franchisor, its agent, or affiliates offers directly or
indirectly to the franchisee. The franchisor may summarize the terms of each
financing arrangement in tabular form, using footnotes to provide additional
information. For each financing arrangement, disclose: Payments due within 90
days on open account. financing are not required to be disclosed under this
section. Indirect offers of financing include a written arrangement between a
franchisor or its affiliate and a lender, for the lender to offer financing to a
franchisee; an arrangement in which a franchisor or its affiliate receives a
benefit from a lender in exchange for financing a franchise purchase; and a
franchisor's guarantee of a note, lease, or other obligation of the franchisee.
(i) A description of what the financing covers (e.g., the initial franchise fee,
site acquisition, construction or remodeling, initial or replacement equipment
or fixtures, opening or ongoing inventory or supplies, or other continuing
expenses). Include specimen copies of the financing documents as an exhibit to
paragraph (v) of this section. Cite the section and name of the document
containing the financing terms and conditions.
(ii) The identity of the lender(s) providing the financing and any relationship
to the franchisor (e.g., affiliate);
(iii) The amount of financing offered or, if the amount depends on an actual
cost that may vary, the percentage of the cost that will be financed;
(iv) The annual percentage rate of interest (``APR'') charged, computed as
provided by Sections 106-107 of the Consumer Protection Credit Act, 15 U.S.C.
1605-1606. If the APR may differ depending on when the financing is issued,
disclose the APR on a specified recent date;
(v) The number of payments or the period of repayment;
(vi) The nature of any security interest required by the lender;
(vii) Whether a person other than the franchisee must personally guarantee the
debt;
(viii) Whether the debt can be prepaid and the nature of any prepayment penalty;
(ix) The franchisee's potential liabilities upon default, including any:
(A) Accelerated obligation to pay the entire amount due;
(B) Obligations to pay court costs and attorney's fees incurred in collecting
the debt;
(C) Termination of the franchise; or
(D) Liabilities from cross defaults such as those resulting directly from
non-payment, or indirectly from the loss of business property; and
(x) Other material financing terms.
(2) Disclose whether any provisions of the loan agreement require franchisees to waive defenses or other legal rights (e.g., confession of judgment), or bar the franchisee from asserting a defense against the lender, the lender's assignee or the franchisor. If so, describe the relevant provisions.
(3) Disclose whether the
franchisor's practice or intent is to sell, assign, or discount to a third party
all or part of the financing arrangement. If so, disclose:
(i) The assignment terms, including whether the franchisor will remain primarily
obligated to provide the financed goods or services; and
(ii) That the franchisee may lose all its defenses against the lender as a
result of the sale or assignment.
(4) Disclose whether the franchisor or an affiliate receives any payments for
the placement of financing with the lender. If such payments exist:
(i) Disclose the amount or the method of determining the payment; and
(ii) Identify the source of the payment and the relationship of the source to
the franchisor or its affiliates.
FRANCHISE DISCLOSURE ITEM 11
ITEM 11: Franchisor's Assistance, Advertising, Computer Systems, and Training.
Disclose the franchisor's principal assistance and related obligations as described below. For each obligation, cite the section number of the franchise agreement imposing the obligation. Begin by stating: ``Except as listed below, [the franchisor] is not required to provide any assistance to you.''
(1) Disclose the franchisor's pre
opening obligations to the franchisee including any assistance in:
(i) Locating a site and negotiating the purchase or lease of the site.
(A) Disclose whether the franchisor generally owns the premises and leases it to
the franchisee;
(B) Whether the franchisor selects the site or approves an area within which the
franchisee selects a site. Disclose further how and whether the franchisor must
approve a franchisee-selected site;
(C) The factors that the franchisor considers in selecting or approving sites
(e.g., general location and neighborhood, traffic patterns, parking, size,
physical characteristics of existing buildings, and lease terms);
(D) The time limit for the franchisor to locate or to approve or disapprove the
site. Disclose further the consequences if the franchisor and franchisee cannot
agree on a site.
(ii) Conforming the premises to local ordinances and building codes and
obtaining any required permits;
(iii) Constructing, remodeling, or decorating the premises;
(iv) Hiring and training employees; and
(v) Providing for necessary equipment, signs, fixtures, opening inventory, and
supplies. In addition, disclose further:
(A) Whether the franchisor provides these items directly or merely provides the
names of approved suppliers;
(B) Whether the franchisor provides written specifications for
these items; and
(C) Whether the franchisor delivers or installs these items;
(2) Disclose the typical length
of time between the signing of the franchise agreement or the first payment of
consideration for the franchise and the opening of the franchisee's business.
Describe the factors that may affect the time period such as ability to obtain a
lease, financing or building permits, zoning and local ordinances, weather
conditions, shortages, or delayed installation of equipment, fixtures, and
signs.
(3) Disclose the franchisor's
obligations to the franchisee during the operation of the franchise, including
any assistance in:
(i) Developing products or services to be offered by the franchisee to its
customers;
(ii) Hiring and training employees;
(iii) Improving and developing the franchised business;
(iv) Establishing prices;
(v) Establishing and using administrative, bookkeeping, accounting, and
inventory control procedures; and
(vi) Resolving operating problems encountered by the franchisee.
(4) Describe the advertising
program for the franchise system. Disclose the following:
(i) The franchisor's obligation to conduct advertising, including:
(A) The media the franchisor may use;
(B) Whether media coverage is local, regional, or national;
(C) The source of the advertising (e.g., an in house advertising department or a
national or regional advertising agency); and
(D) Whether the franchisor must spend any amount on advertising in the area or
territory where the franchisee is located.
(ii) Disclose the conditions under which the franchisor permits franchisees to
use their own advertising material.
(iii) Disclose whether there is an advertising council composed of franchisees
that advises the franchisor on advertising policies. If so, disclose:
(A) How members of the council are selected;
(B) Whether the council serves in an advisory capacity only or has operational
or decision making power; and
(C) Whether the franchisor has the power to form, change, or dissolve the
advertising council.
(iv) Disclose whether the franchisee must participate in a local or regional
advertising cooperative. If so, disclose:
(A) How the area or membership of the cooperative is defined;
(B) How much the franchisee must contribute to the fund and whether other
franchisees are required to contribute at a different rate;
(C) Whether the franchisor-owned outlets must contribute to the fund and, if so,
whether it is on the same basis as franchisees;
(D) Who is responsible for administration of the cooperative (e.g., franchisor,
franchisees, or advertising agency);
(E) Whether cooperatives must operate from written governing documents and
whether the documents are available for review by the franchisee;
(F) Whether cooperatives must prepare annual or periodic financial statements
and whether the statements are available for review by the franchisee; and
(G) Whether the franchisor has the power to require cooperatives to be formed,
changed, dissolved, or merged.
(v) Disclose whether the franchisee must participate in any other advertising
fund. If so, disclose:
(A) Who contributes to the fund;
(B) How much the franchisee must contribute to the fund and whether other
franchisees are required to contribute at a different rate;
(C) Whether the franchisor owned outlets must contribute to the fund and, if so,
whether it is on the same basis as franchisees;
(D) Who administers the fund;
(E) Whether the fund is audited and when it is audited;
(F) Whether financial statements of the fund are available for review by the
franchisee; and
(G) Use of the fund in the most recently concluded fiscal year, the percentages
spent on production, media placement, administrative expenses, and a description
of any other use.
(vi) If all advertising funds are not spent in the fiscal year in which they
accrue, explain how the franchisor uses the remaining amount. Indicate whether
franchisees will receive a periodic accounting of how advertising fees are
spent.
(vii) Disclose the percentage of advertising funds, if any, that the franchisor
uses principally to solicit new franchise sales.
(5) Disclose whether the
franchisor requires the franchisee to buy or use electronic cash registers or
computer systems. If so, describe the systems generally in non-technical
language.
(i) Identify each hardware component and software program by brand, type, and
principal functions.
(A) If the hardware component or software program is the proprietary property of
the franchisor, an affiliate, or a third party, state whether the franchisor, an
affiliate, or a third party has the contractual right or obligation to provide
ongoing maintenance, repairs, upgrades, or updates. Disclose the current annual
cost of any optional or required maintenance and support contracts, upgrades,
and updates;
(B) If the hardware component or software program is the proprietary property of
a third party, and no compatible equivalent component or program has been
approved by the franchisor for use with the system to perform the same
functions, identify the third party by name, business address, and telephone
number, and state the length of time the component or program has been in
continuous use by the franchisor and its franchisees;
(C) If the hardware component or software program is not proprietary, identify
compatible equivalent components or programs that perform the same functions and
indicate whether they have been approved by the franchisor.
(ii) State whether the franchisee has any contractual obligation to upgrade or
update any hardware component or software program during the term of the
franchise and, if so, whether there are any contractual limitations on the
frequency and cost of the obligation.
(iii) For each electronic cash register system or software program, describe how
it will be used in the franchisee's business, and the types of business
information or data that will be collected and generated. State further whether
the franchisor will have independent
access to the information and data and, if so, whether there are any contractual
limitations on the franchisor's right to access theinformation and data.
(6) Disclose the table of contents of the franchisor's operating manual(s) provided to franchisees as of the franchisor's last fiscal year end or a more recent date. State further the number of pages devoted to each subject and the total number of pages in the manual as of this date. Alternatively, this disclosure may be omitted if the prospective franchisee views the manual before purchase of the franchise.
(7) Disclose the franchisor's
training program as of the franchisor's last fiscal year end or a more recent
date.
(i) Describe the nature of the training program summarized in tabular form, as
follows:
Training Program
----------------------------------------------------------------------------------------------------------------
Hours of classroom Hours of on the job
Subject training training Location
----------------------------------------------------------------------------------------------------------------
(A) In column (1), state the subjects taught.
(B) In column (2), state the hours of classroom training for each subject.
(C) In column (3), state the hours of on the job training for each subject.
(D) In column (4), state the location of the training for each subject.
(ii) Disclose how often training classes are held and the nature of the location
or facility where training is held (e.g., company, home, office, franchisor
owned store).
(iii) Describe the nature of instructional materials and the instructor's
experience. State the length of experience of the instructor in the field and,
specifically, with the franchisor. State only the experience that is relevant to
the subject taught and the
franchisor's operations;
(iv) Disclose any charges franchisees must pay for training and who must pay
travel and living expenses of the enrollees in the training program;
v) Disclose who may and who is required to attend the training. State whether
the franchisee or other persons must complete the program to the franchisor's
satisfaction. If successful completion is required, state how long after the
signing of the agreement or before the opening of the business the training must
be completed. If training is not mandatory, state the percentage of new
franchisees that enrolled in the training program during the preceding 12
months; and
(vi) Whether any additional training programs and/or refresher courses are
required.
FRANCHISE DISCLOSURE ITEM 12
ITEM 12: Territory.
(1) Disclose the following
information concerning the franchisee's market area (with or without an
exclusive territory):
(i) If applicable, the minimum area granted to the franchisee (e.g., a specific
radius, a distance sufficient to encompass a specified population, or another
specific designation);
(ii) Whether the franchise is granted for a specific location or a location to
be approved by the franchisor;
(iii) Any conditions under which the franchisor will approve the relocation of
the franchised business or the franchisee's establishment of additional
franchised outlets;
(iv) Whether the franchisor has established or may establish another franchisee
who may also use the franchisor's trademark within the defined area;
(v) Whether the franchisor has established or may establish franchisor owned
outlets or other channels of distribution using the franchisor's trademark
within the defined area;
(vi) Whether the franchisor or its affiliate has established or may establish
other franchises or franchisor-owned outlets or another channel of distribution
selling or leasing similar products or services under a different trademark
within the defined area;
(vii) Restrictions on the franchisor regarding operating franchisor owned stores
or on granting franchised outlets for a similar or competitive business within
the defined area; (viii) Restrictions on franchisees from soliciting or
accepting orders outside of their defined territories;
(ix) Restrictions on the franchisor from soliciting or accepting orders inside
the franchisee's defined territory. State further any compensation that the
franchisor must pay for soliciting or accepting orders inside the franchisee's
defined territories; and
(x) Franchisee options, rights of first refusal, or similar rights to acquire
additional franchises within the territory or contiguous territories.
(2) Describe any exclusive
territory granted the franchisee.
(i) If the franchisor grants an exclusive territory, disclose:
(A) Whether continuation of the franchisee's territorial exclusivity depends on
achievement of a certain sales volume, market penetration, or other contingency,
and under what circumstances the franchisee's territory may be altered. Specify
any sales or other conditions. State the franchisor's rights if the franchisee
fails to meet the requirements; and
(B) Any other circumstances that permit the franchisor to modify the
franchisee's territorial rights (e.g., a population increase in the territory
giving the franchisor the right to grant an additional franchise within the
area), and the effect of such modifications on the franchisee's rights;
(ii) If the franchisor does not grant exclusive territories, state:
``You will not receive an exclusive territory. [Franchisor] may establish other
franchised or franchisor-owned outlets that may compete with your location.''
(3) If the franchisor or an
affiliate operates, franchises, or has present plans to operate or franchise a
business under a different trademark and that business sells goods or services
similar to those to be offered by the franchisee, describe:
(i) The similar goods and services;
(ii) The trade names and trademarks;
(iii) Whether outlets will be franchisor owned or operated:
(iv) Whether the franchisor or its franchisees who use the different trademark
will solicit or accept orders within the franchisee's territory;
(v) A timetable for the plan;
(vi) How the franchisor will resolve conflicts between the franchisor and the
franchisees and between the franchisees of each system regarding territory,
customers or franchisor support; and
(vii) The principal business address of the franchisor's similar operating
business. If it is the same as the franchisor's principal business address
disclosed in paragraph (a) of this section, disclose whether the franchisor
maintains (or plans to maintain) physically
separate offices and training facilities for the similar competing business.
FRANCHISE DISCLOSURE ITEM 13
ITEM 13: Trademarks.
(1) Disclose each principal trademark to be licensed to the franchisee. For purposes of this Item, ``principal trademark'' means the primary trademarks, service marks, names, logos, and commercial symbols to be used by the franchisee to identify the franchised business. It does not include every trademark owned by the franchisor.
(2) For each principal trademark,
disclose whether the trademark is registered with the United States Patent and
Trademark Office.
(i) For each registration, state:
(A) The date and identification number of each trademark registration or
registration application;
(B) Whether the franchisor has filed all required affidavits;
(C) Whether any registration has been renewed; and
(D) Whether the principal trademarks are registered on the Principal or
Supplemental Register of the U.S. Patent and Trademark Office, and if not,
whether an ``intent to use'' application or an application based on actual use
has been filed with the U.S. Patent and
Trademark Office.
(ii) If the trademark is not registered on the Principal Register of the U.S.
Patent and Trademark Office, state: ``By not having a Principal Register federal
registration for [name or description of symbol], [name of franchisor] does not
have certain presumptive legal rights granted by a registration.''
(3) Disclose any currently
effective material determinations of the U.S. Patent and Trademark Office, the
Trademark Trial and Appeal Board, or the trademark administrator of any State or
court; and any pending infringement, opposition, or cancellation proceeding.
Include infringement, opposition, or cancellation proceedings in which the
franchisor unsuccessfully sought to prevent registration of a trademark in order
to protect a trademark licensed by the franchisor. Describe how the
determination affects the franchised business.
(4) Disclose any pending material
federal or State litigation regarding the franchisor's use or ownership rights
in a trademark. For each pending action, franchisors may include a summary
opinion of counsel concerning any action if a consent to use the summary opinion
is included as part of the disclosure document.
(i) The forum and case number;
(ii) The nature of claims made opposing the franchisor's use or by the
franchisor opposing another person's use; and
(iii) Any effective court or administrative agency ruling concerning the matter.
(5) Disclose agreements currently
in effect that significantly limit the rights of the franchisor to use or
license the use of trademarks listed in this Item in a manner material to the
franchise. For each agreement, disclose:
(i) The manner and extent of the limitation or grant;
(ii) The extent to which the franchisee may be affected by the agreement;
(iii) The agreement's duration;
(iv) The parties to the agreement;
(v) The circumstances under which the agreement may be canceled or modified; and
(vi) All other material terms.
(6) Disclose whether the
franchisor must protect the franchisee's right to use the principal trademarks
listed in this Item, and must protect the franchisee against claims of
infringement or unfair competition arising out of the franchisee's use of the
trademarks. Disclose further:
(i) The franchisee's obligation to notify the franchisor of the use of, or
claims of rights to, a trademark identical to or confusingly similar to a
trademark licensed to the franchisee;
(ii) Whether the franchise agreement requires the franchisor to take affirmative
action when notified of these uses or claims. Identify who has the right to
control administrative proceedings or litigation;
(iii) Whether the franchise agreement requires the franchisor to participate in
the franchisee's defense and/or indemnify the franchisee for expenses or damages
if the franchisee is a party to an administrative or judicial proceeding
involving a trademark licensed by the franchisor to the franchisee, or if the
proceeding is resolved unfavorably to the franchisee; and
(iv) The franchisee's rights under the franchise agreement if the franchisor
requires the franchisee to modify or discontinue the use of a trademark.
(7) Disclose whether the
franchisor actually knows of either superior prior rights or infringing uses
that could materially affect the franchisee's use of the principal trademarks in
the State in which the franchised business is to be located. For each use of a
principal trademark that the franchisor believes constitutes an infringement
that could materially affect the franchisee's use of a trademark, disclose:
(i) The nature of the infringement;
(ii) The location(s) where the infringement is occurring;
(iii) The length of time of the infringement (to the extent known); and
(iv) Action taken by the franchisor.
FRANCHISE DISCLOSURE ITEM 14
ITEM 14: Patents, Copyrights, and Proprietary Information.
(1) Disclose whether the
franchisor owns rights in patents or copyrights that are material to the
franchise. For each patent or copyright:
(i) Describe the patent or copyright and its relationship to the franchise;
(ii) State the duration of the patent or copyright;
(iii) For copyrights, state:
(A) The registration number and date of each copyright; and.
(B) Whether the franchisor can and intends to renew the copyright.
(iv) For patents, state:
(A) The patent number, issue date, and title for each patent, and the serial
number, filing date, and title of each patent application; and
(B) Describe the type of patent or patent application (e.g., mechanical,
process, or design).
(2) Describe any current material determination of the U.S. Patent and Trademark Office, the U.S. Copyright Office, or a court regarding the patent or copyright. Include the forum and case number. Describe how the determination affects the franchised business.
(3) State the forum, case number, claims asserted, issues involved, and effective determinations for any material proceeding pending in the U.S. Patent and Trademark Office or the U.S. Court of Appeals for the Federal Circuit. Franchisors may include a summary opinion of counsel concerning any action if a consent to use the summary opinion is included as part of the disclosure document. Franchisors may include a summary opinion of counsel concerning any action if a consent to use the summary opinion is included as part of the disclosure document.
(4) If an agreement limits the use of the patent, patent application, or copyright, state the parties to and duration of the agreement, the extent to which the franchisee may be affected by theagreement, and other material terms of the agreement.
(5) Disclose the franchisor's
obligation to protect the patent, patent application, or copyright and to defend
the franchisee against claims arising from the franchisee's use of the patented
or copyrighted items. Disclose further:
(i) Whether the franchisee must notify the franchisor of claims or infringements
or if the action is discretionary;
(ii) Whether the franchise agreement requires the franchisor to take affirmative
action when notified of infringement. Disclose who has the right to control
litigation;
(iii) Whether the franchisor must participate in the defense of a franchisee or
indemnify the franchisee for expenses or damages in a proceeding involving a
patent, patent application, or copyright licensed to the franchisee;
(iv) Requirements that the franchisee modify or discontinue use of the subject
matter covered by the patent or copyright; and
(v) The franchisee's rights under the franchise agreement if the franchisor
requires the franchisee to modify or discontinue use of the subject matter
covered by the patent or copyright.
(6) If the franchisor actually
knows of an infringement that could materially affect the franchisee, disclose:
(i) The nature of the infringement;
(ii) The location where the infringement is occurring;
(iii) The length of time of the infringement; and
(iv) Action taken or anticipated by the franchisor.
(7) If the franchisor claims
proprietary rights in other confidential information or trade secrets, describe
in general terms the proprietary information communicated to the franchisee and
the terms and conditions for use by the franchisee. The franchisor need
only describe the general nature of the proprietary information, such as whether
a formula or recipe is considered to be a trade secret.
FRANCHISE DISCLOSURE ITEM 15
ITEM 15: Obligation to Participate in the Actual Operation of the Franchise
Business.
(1) Disclose the franchisee's obligation to participate personally in the direct operation of the franchise business and whether the franchisor recommends participation. Include obligations arising from any written agreement or from the franchisor's practice.
(2) If personal ``on-premises''
supervision is not required, disclose the following:
(i) If the franchisee is an individual, state:
(A) Whether the franchisor recommends on premises supervision by the franchisee;
(B) Limitations on whom the franchisee can hire as an on premises supervisor,
and
(C) Whether an on-premises supervisor must successfully complete the
franchisor's training program.
(ii) If the franchisee is a business entity, state the amount of equity interest
that the on premises supervisor must have in the franchise.
(3) Disclose any restrictions that the franchisee must place on its manager (e.g., maintain trade secrets, covenants not to compete).
FRANCHISE DISCLOSURE ITEM 16
ITEM 16: Restrictions on What the Franchisee May Sell.
Disclose any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit the franchisee's customers. Disclose further:
(1) Any obligation on the franchisee to sell only goods and services approved by the franchisor;
(2) Any obligation on the franchisee to sell all goods and services authorized by the franchisor;
(3) Whether the franchisor has the right to change the types of authorized goods and services and whether there are limits on the franchisor's right to make changes; and
(4) Any restrictions on the franchisee's customers.
FRANCHISE DISCLOSURE ITEM 17
ITEM 17: Renewal, Termination, Transfer, and Dispute Resolution.
Disclose, in the tabular form
shown below, a table that cross references each enumerated franchise
relationship item with the applicable provision in the franchise or related
agreement. Summarize briefly each contractual provision. If a particular item is
not applicable, state ``Not Applicable.'' If the agreement is silent concerning
one of the listed provisions, but the franchisor unilaterally offers to provide
certain benefits or
protections to franchisees as a matter of policy, use a footnote to describe
this policy and state whether the policy is subject to change. This table lists
certain important provisions of the franchise and related agreements. You should
read these provisions in the agreements attached to this disclosure document.
------------------------------------------------------------------------
Provision Section in Franchise Agreement Summary
------------------------------------------------------------------------
a. Length of the franchise term
b. Renewal or extension of the term.
c. Requirements for franchisee to renew or extend.
d. Termination by franchisee.
e. Termination by franchisor without cause.
f. Termination by franchisor with cause.
g. ``Cause'' defined curable defaults.
h. ``Cause'' defined noncurable defaults.
i. Franchisee's obligations on termination/non renewal.
j. Assignment of contract by franchisor.
k. ``Transfer'' by franchisee defined.
l. Franchisor approval of transfer by franchisee.
m. Conditions for franchisor approval of transfer.
n. Franchisor's right of first refusal to acquire franchisee's business.
o. Franchisor's option to purchase franchisee's business.
p. Death or disability of franchisee.
q. Non compete covenants during the term of the franchise.
r. Non compete covenants after the franchise is terminated or expires.
s. Modification of the agreement.
t. Integration merger clause
u. Dispute resolution by arbitration or mediation.
v. Choice of forum.
w. Choice of law.
FRANCHISE DISCLOSURE ITEM 18
ITEM 18: Public Figures.
Disclose the following information about any public figures involved in the franchise. A public figure means a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located.
(1) Any compensation paid or promised to a public figure arising from either the use of the public figure in the franchise name or symbol; or the endorsement or recommendation of the franchise to prospective franchisees.
(2) The extent to which the public figure is involved in the actual management or control of the franchisor. Describe the public figure's position and duties in the franchisor's business structure.
(3) The total investment of the public figure in the franchisor. Describe the extent of the amount contributed in services performed or to be performed. State the type of investment (e.g., common stock, promissory note).
FRANCHISE DISCLOSURE ITEM 19
ITEM 19: Financial Performance Representations.
(1) All franchisors begin by stating: The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only where: a franchisor provides the actual records of an existing outlet you are considering buying; or a franchisor provides financial performance information in paragraph (s) of this section and supplements that information by providing, for example, information about possible performance at a particular location.
(2) If a franchisor does not
provide any financial performance representations, also state: This franchisor
does not make any representations about a franchisee's financial performance. We
also do not authorize our employees or representatives to make any such
representations either orally or in writing. If you receive any financial
performance
information or projections of your future income, you should report it to the
franchisor's management by contacting [name and address of person to be
notified], the Federal Trade Commission, and the appropriate State regulatory
agencies.
(3) If the franchisor makes any
financial performance representations to prospective franchisees, the franchisor
must have a reasonable basis and written substantiation for the representations
at the time they are made, and must state the representations in its Item 19
disclosure. The franchisor must also disclose the following:
(i) Whether the representation is an historical financial performance
representation about the franchise system's existing outlets, or a subset of
those outlets, or is a forecast of the prospective franchisee's future financial
performance. If a financial performance representation is a representation
concerning historical financial performance or if historical financial
performance data are used as the basis for a forecast of future earnings, the
historical data must be prepared according to U.S. generally accepted accounting
principles. A statement or prediction of future performance that is prepared as
a forecast in accordance with the statement on standards for accountants'
services on prospective financial information (or its successor) issued by the
American Institute of Certified Public Accountants, Inc., is presumed to have a
reasonable basis.
(ii) If the representation relates to the past performance of the franchise
system's existing outlets, disclose the material bases for the representation,
including:
(A) Whether the representation relates to the performance of all of the
franchise system's existing outlets or only to a subset of outlets that share a
particular set of characteristics (e.g., geographic location, type of location
(such as free standing vs. shopping center), degree of competition in the market
area, length of time the outlets have been in operation, services or goods sold,
services supplied by the franchisor, and whether the units are franchised or
franchisor-owned or operated);
(B) The dates during which the reported level of financial performance was
achieved;
(C) The total number of outlets that existed in the relevant period and, if
different, the number of outlets that had the described characteristics;
(D) The number of outlets with the described characteristics whose actual
financial performance data were utilized in arriving at the representation;
(E) Of those outlets whose data were utilized in arriving at the representation,
the number and percent that actually attained or surpassed the stated results;
and An historical financial performance representation will have a reasonable
basis if it is representative of the usual experience of the system's outlets or
a subset of those outlets that share specified characteristics. A representation
would not have a reasonable basis if, for example, only a small minority of the
stated set of franchisees earn such an amount, if profits were due to
non-recurring conditions, of if the franchisees used inconsistent systems for
reporting financial performance information.
(F) Characteristics of the included outlets, such as those noted in paragraph
(s)(3)(i) of this section, that may differ materially from those of the outlet
that may be offered to a prospective franchisee.
(iii) If the representation is a forecast of future financial performance, state
the material bases and assumptions on which the projection is based. The
material assumptions underlying a forecast include significant factors upon
which a franchisee's future results are expected to depend. These factors
include, for example, economic or market conditions that are basic to a
franchisee's operation, and encompass matters affecting, among other things, a
franchisee's sales, the cost of goods or services sold, and operating expenses;
(iv) Include a conspicuous admonition that a new franchisee's individual
financial results may differ from the result stated in the financial performance
representation; and
(v) State that written substantiation for the financial performance
representation will be made available to the prospective franchisee upon
reasonable request. Franchisors must possess written substantiation for any
financial performance representations and must make this substantiation
available to prospective franchisees and the Commission upon reasonable request.
The franchisor may impose reasonable time and place limitations, and may
restrict copying of documents. However, restrictions that as a practical matter
frustrate a franchisee's ability to review the franchisor's financial
performance information will be deemed to violate the Rule. See Section
436.10(c) (prohibition on failing to make information available). In order to
protect franchisees from
unwarranted disclosure of sensitive financial information, the franchisor may
delete information that might identify the franchisee. This limitation, however,
does not apply to disclosuresmade to the Commission.
(4) If a franchisor wishes to disclose only the actual operating results for a
specific outlet being offered for sale, it is not required to comply with this
section, provided the information is given only to potential purchasers of that
outlet and is accompanied by the name and last known address of each owner of
the outlet during the prior three years.
(5) If financial performance
representations are provided in paragraph (s) of this section, the franchisor
may deliver to a prospective franchisee a supplemental financial performance
representation about a particular location or variation, apart from the
disclosure document. The supplemental representation must:
(i) be in writing;
(ii) explain the departure from the financial performance representation in the
disclosure document;
(iii) be prepared in accordance with the requirement set forth above in
paragraphs (s)(3)(i)-(iii) of this section; and
(iv) be left with the prospective franchisee.
FRANCHISE DISCLOSURE ITEM 20
ITEM 20: Outlets and Franchisee Information.
(1) Disclose, in the tabular form shown below, the status of franchised outlets by State for each of the franchisor's last three fiscal years. For purposes of this paragraph, ``outlets'' includes outlets of a type substantially similar to that offered to the prospective franchisee.
Franchised Outlets Summary for
Years
[YR-3--YR-1]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Outlets
that
Outlets Outlets Outlets Outlets ceased Total
Outlets Outlets terminated reacquired transferred that were operation Total
number outlets
at with same by by by not or closed of outlets in
State and year beginning ownership franchisor franchisor franchisee renewed for
other discontinued operation
of fiscal at end of during the during the to new during reasons during the at
end of
year fiscal fiscal fiscal owner the during fiscal year fiscal
year year year during the fiscal the year
fiscal year year fiscal
year
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
--------------------------------------------------------------------------------------------------------------------------------------------------------
(i) In column (1), list each State where one or more franchised outlets are
located. Below each State, list each of the last three fiscal years.
(ii) In column (2), disclose the number of outlets in each State in operation at
the beginning of each fiscal year.
(iii) In column (3), disclose the number of outlets in each State where the
controlling ownership of the outlet did not change during the year.
(iv) In column (4), disclose the number of outlets in each State where the
franchisee operating the outlet at the beginning of the fiscal year did not
operate the outlet at the end of the fiscal year because the franchisor
terminated or canceled the franchise agreement without providing any
consideration to the franchisee (whether by payment or forgiveness or assumption
of debt) before the end of the agreement term. For purposes of this Item, a
termination or cancellation occurs when the franchisor sends the franchisee an
unconditional notice of intent to exercise its right to terminate or cancel the
franchise agreement.
(v) In column (5), disclose the number of outlets in each State where the
franchisee operating the outlet at the beginning of the fiscal year did not
operate the outlet at the end of the fiscal year because the franchisor
reacquired the outlet for consideration
(whether by payment or forgiveness or assumption of debt) from that franchisee
before the end of the agreement term.
(vi) In column (6), disclose the number of outlets in each State where the
franchisee operating the outlet at the beginning of the fiscal year did not
operate the outlet at the end of the fiscal year because that franchisee
transferred controlling interest in the franchise to one or more new owners,
other than the franchisor or an affiliate, before the end of the agreement term.
(vii) In column (7), disclose the number of outlets in each State where the
franchisee operating the outlet at the beginning of the fiscal year did not
operate the outlet at the end of the fiscal year because the franchise agreement
was not renewed at the end of
its term. For purposes of this Item, a non renewal occurs when the franchisor
sends the franchisee an unconditional notice of intent to exercise its right not
to renew the franchise agreement after it expires.
(viii) In column (8), disclose the number of outlets in each State where the
franchisee operating the outlet at the beginning of the fiscal year did not
operate the outlet at the end of the fiscal year for reasons other than
termination, reacquisition, transfer, or post term non renewal (include here
outlets that are still owned by the franchisee operating the outlet at the
beginning of the fiscal year, but which have ceased to do business under the
franchise agreement).
(ix) In column (9), disclose the total number of outlets in the State where a
franchisee operating an outlet at the beginning of the year did not continue to
operate the outlet at the end of the fiscal year. This figure should be the sum
of the figures in columns (4) through (8).
(x) In column (10), disclose the number of outlets in each State in operation at
the end of the fiscal year.
(xi) Report the ownership status of each outlet only once. The sum of columns
(3) and (9) should equal the number of outlets at the beginning of the fiscal
year (column 2). If an outlet is involved in more than one ownership change in a
given fiscal year, report only
the change in ownership by the franchisee operating the outlet at the beginning
of the year. If the change in ownership of an outlet could be reported in more
than one category, report only the event that occurred first chronologically.
(2) Disclose, in the tabular form
shown below, a table showing the status of franchisor-owned outlets by State for
each of the franchisor's last three fiscal years.
Franchisor-Owned Outlets Summary for [YR-3--YR-1]
----------------------------------------------------------------------------------------------------------------
Outlets
operating at Outlets opened Outlets closed Total number
State and year the beginning during the during the of outlets at
of the fiscal fiscal year fiscal year the end of the
year fiscal year
(1) (2) (3) (4) (5)
----------------------------------------------------------------------------------------------------------------
State:
YR-1.......................................... .............. ..............
.............. ..............
YR-2.......................................... .............. ..............
.............. ..............
YR-3.......................................... .............. ..............
.............. ..............
Totals:
YR-1.......................................... .............. ..............
.............. ..............
YR-2.......................................... .............. ..............
.............. ..............
YR-3.......................................... .............. ..............
.............. ..............
----------------------------------------------------------------------------------------------------------------
(i) In column (1), list each State where one or more franchisor owned outlets
are located. Below each State, list each of the last three fiscal years.
(ii) In column (2), disclose the number of franchisor owned outlets in each
State operating at the beginning of each fiscal year.
(iii) In column (3), disclose the number of franchisor owned outlets opened in
each State during each fiscal year.
(iv) In column (4), disclose the number of franchisor owned outlets closed in
each State during each fiscal year.
(v) In column (5), disclose the number of franchisor owned outlets in operation
in each State at the end of each fiscal year.
(3) Disclose, in the tabular form shown below, an estimate for each applicable
State that reflects the number of franchised and franchisor owned outlets to be
opened during the one year period after the close of the franchisor's most
recent fiscal year.
Projected Openings As of
[Close of Fiscal Year]
----------------------------------------------------------------------------------------------------------------
Franchise agreements Projected franchised projected franchisor-
State signed but outlet not outlets in the next owned outlets in the
open fiscal year next fiscal year
----------------------------------------------------------------------------------------------------------------
(1) (2).................... (3).................... (4)
Totals......................... ....................... .......................
.........................
----------------------------------------------------------------------------------------------------------------
(i) In column (1), list each State where the franchisor has signed a franchise
agreement, but the outlet is not yet opened, as well as each State where the
franchisor expects to open a new outlet (franchisor owned or franchised) in the
next fiscal year.
(ii) In column (2), disclose the number of franchise agreements signed in each
State where the outlet is not yet opened.
(iii) In column (3), disclose the projected number of new franchised outlets in
each State in the next fiscal year.
(iv) In column (4), disclose the projected number of new franchisor owned
outlets in the next fiscal year.
(4) Disclose the names of all current franchisees and the address and telephone
number of each of their outlets. In the alternative, the franchisor may disclose
all franchised outlets in the State, but if these franchised outlets total fewer
than 100, disclose franchised outlets from contiguous States and then the next
closest State until at least 100 franchised outlets are listed.
(5) Disclose the name and last known home address and telephone number of every franchisee who has had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year or who has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.
(6) If franchisees have signed
gag clauses in a franchise agreement, settlement, or in any other contract,
during the last three fiscal years:
(i) State: ``In some instances, current and former franchisees sign provisions
restricting their ability to speak openly about their experience with [name of
franchise system]. While we encourage you to speak with current and former
franchisees, be aware that not all such franchisees will be able to communicate
with you.''
(ii) Franchisors may also disclose the number and percentage of current and
former franchisees who during each of the last three fiscal years have signed
agreements that include gag clauses and may disclose the circumstances under
which such clauses were signed.
(7) Disclose the name, address,
and telephone number of each trademark specific franchisee organization
associated with the franchise system being offered, if such organization:
(i) Has been created, supported, or recognized by the franchisor; or
(ii) Is incorporated and asks the franchisor to be included in the franchisor's
disclosure document during the next fiscal year. All such organizations must
renew their request for inclusion in disclosure documents on an annual basis.
The franchisor has no obligation to verify the organization's continued
existence during or at the end of each fiscal year.
Franchisor-Owned Outlets Summary
for 1995-1997
----------------------------------------------------------------------------------------------------------------
Outlets
operating at Outlets opened Outlets closed Total number
State and year the beginning during the during the of outlets at
of the fiscal fiscal year fiscal year the end of the
year fiscal year
(1) (2) (3) (4) (5)
----------------------------------------------------------------------------------------------------------------
AL:
1997.......................................... 5 0 0 5
1996.......................................... 3 2 0 5
1995.......................................... 4 2 3 3
MI:
1997.......................................... 4 1 0 5
1996.......................................... 6 0 2 4
1995.......................................... 5 2 1 6
WY:
1997.......................................... 1 0 0 1
1996.......................................... 0 2 1 1
1995.......................................... 0 0 0 0
----------------------------------------------------------------------------------------------------------------
Totals:
1997.................................... 10 1 0 11
1996.................................... 9 4 3 10
1995.................................... 9 4 4 9
----------------------------------------------------------------------------------------------------------------
Projected Openings as of December 31, 1997
----------------------------------------------------------------------------------------------------------------
Franchise Projected Projected
agreements franchised franchisor-owned
State signed but outlets in the outlets in the
outlet not open next fiscal year next fiscal year
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
AL........................................................ 1 1 0
MI........................................................ 0 3 2
WY........................................................ 1 0 0
-----------------------------------------------------
Totals.............................................. 2 4 2
----------------------------------------------------------------------------------------------------------------
FRANCHISE DISCLOSURE ITEM 21
ITEM 21: Financial Statements.
1) Include the following
financial statements prepared according to generally accepted United States
accounting principles. Except as provided in paragraph (u)(2) of this section,
these financial statements must be audited by an independent certified public
accountant. Present the required financial statements in a tabular form that
compares at least two fiscal years.
(i) Financial statements: The franchisor's balance sheet for the previous two
fiscal year ends before the disclosure document issuance date. In addition,
include statements of operations, of stockholders equity, and of cash flows for
each of the franchisor's previous three fiscal years.
(ii) Affiliated company statements: Instead of the disclosure required by
paragraph (u)(1)(i) of this Section, the franchisor may include financial
statements of its affiliated company if the affiliated company's financial
statements satisfy paragraph (u)(1)(i)
of this section and the affiliated company absolutely and unconditionally
guarantees to assume the duties and obligations of the franchisor under the
franchise agreement. The affiliate's guarantee must cover all of the
franchisor's obligations to the franchisee, but
is not required to extend to third parties. If this alternative is used,
disclose the existence of a guarantee.
(iii) Consolidated and separate statements:
(A) When a franchisor owns a direct or beneficial controlling financial interest
in another corporation, its financial statements should reflect the financial
condition of the franchisor and its subsidiaries.
(B) Include separate financial statements for the franchisor and any
subfranchisor or comparable entity.
(C) Include separate financial statements for a company controlling 80 percent
or more of a franchisor.
(2) To the extent that start up
franchise systems do not yet have audited financial statements, they may phase
in the use of audited financial statements according to the following schedule:
(A) First partial or full fiscal year selling franchises. None.
(B) Second fiscal year selling franchises. Balance sheet opinion as of the end
of the last fiscal year.
(C) Third and subsequent fiscal years selling franchises. All required financial
statements for the previous fiscal year, plus any
previously disclosed audited statements that still must be disclosed according
to paragraph (u)(1)(i) of this section.
(ii) Audited financial statements shall be prepared as soon as practicable.
(iii) Unaudited statements should be in a format that conforms as closely as
possible to audited statements.
(iv) Disclose clearly and conspicuously in paragraph (u) of this section the
following, if applicable:
(A) The franchisor has not been in business for three years or more, and cannot
include all of the financial statements required in paragraph (u)(1)(i) of this
section; or
(B) The franchisor includes one or more years of unaudited
financial statements.
(v) In the event a start-up franchise system begins offering franchises before
the close of its first full fiscal year of operations, provide at a minimum the
company's unaudited opening balance sheet.
INDEPENDENT
AUDITORS REPORT
Board of Directors and Stockholders of
Franchise Corporation
We have audited the accompanying consolidated financial statements of Franchise
Corporation. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position and financial condition of Franchise
Corporation in conformity with generally accepted accounting principles.
FRANCHISE DISCLOSURE ITEM 22
ITEM 22: Contracts.
Attach a copy of all proposed agreements regarding the franchise offering, including the franchise agreement and any lease, options, and purchase agreements.
(a) Disclose the information
required in sections 436.3-436.5 clearly, legibly, and concisely stated in a
single document, using plain English.
(b) Respond fully to each disclosure Item. If a particular disclosure Item is
not applicable, respond negatively, including a reference to the type of
information required to be disclosed by the Item. Precede each disclosure Item
with the appropriate heading.
(c) Do not include any materials or information other than that required by this
Rule or by State law not preempted by this Rule. Franchisors may prepare multi
State disclosure documents by including State specific information in the text
of the disclosure document or in Exhibits attached to the disclosure document.
(d) Subfranchisors should disclose the required information about the franchisor,
and, to the extent applicable, the same information concerning the subfranchisor.
Electronic Disclosure Documents.
Franchise sellers can furnish disclosures electronically under the following
conditions:
(a) The prospective franchisee expressly consents to accept the disclosures in
the electronic medium offered by the franchise seller. Prospective franchisees,
however, always retain the right to obtain a paper disclosure document from the
franchise seller up until the time of the sale.
(b) The franchise seller simultaneously furnishes the prospective franchisee
with a paper summary document containing only the following three items from the
franchisor's disclosure document:
(1) The cover page;
(2) The table of contents; and
(3) Two copies of the franchisor's Item 23 Receipt, with instructions to
acknowledge receipt through a signature.
(c) The electronic version of the franchisor's disclosure document must be
capable of being printed, downloaded onto computer disk, or otherwise preserved
by a prospective franchisee as one single document.
(d) The electronic version of the franchisor's disclosure document must be a
self contained document that is the functional equivalent of a paper disclosure
document. A prospective franchisee must be able to read each part of the
disclosure document, including attachments, without having to take any
affirmative action other than scrolling through the document.
(e) For the sole purpose of enhancing the prospective franchisee's ability to
maneuver through the electronic version of the disclosure document, the
franchisor may include scroll bars, internal links, and search features. All
other features (e.g., multimedia tools such as audio, video, animation, or
pop-up screens) are prohibited.
(f) The electronic version of the franchisor's disclosure document must remain
accessible at least until the time of the sale. An electronic version will still
be deemed accessible if technological failures occur that are beyond the
franchisor's reasonable control. Further, an electronic version on the Internet
will be deemed accessible if it is updated and replaced with a more current
version.
(g) Franchisors furnishing disclosure documents electronically must retain, and
make available to the Commission upon request, a specimen copy of each
materially different version of their electronic disclosure documents for a
period of three years.
Updating Disclosures.
(a) All information contained in the disclosure document shall be current as of
the close of the franchisor's most recent fiscal year. After the close of the
fiscal year, the franchisor shall, within 90 days, prepare a revised disclosure
document, after which the franchisor may distribute only the revised document
and no other.
(b) The franchisor shall, within a reasonable time after the close of each
quarter of the fiscal year, prepare revisions to be attached to the disclosure
document to reflect any material change in the franchisor or relating to the
franchise business of the franchisor.
Each prospective franchisee shall receive the disclosure document and the
quarterly revisions for the most recent period available at the time.
(c) When furnishing a disclosure document, the franchise seller shall notify the
prospective franchisee of any additional material change in the franchisor, the
franchise business, or franchise agreement that has occurred since the last
quarterly disclosure
document revision. Franchise sellers shall also notify the prospective
franchisee of any other known material change in the franchisor, the franchise
business, or franchisee agreement at the time the completed franchise agreements
are delivered to the prospective franchisee pursuant to section 436.2(a)(2).
(d) Information that is required to be audited pursuant toSec. 436.5(u) is not
required to be audited for quarterly revisions; provided, however, that the
franchisor states in immediate conjunction with the information that such
information has not been audited.
Other Provisions.
Exemptions. The disclosure requirements of sections 436.2--436.8 shall not apply
if the franchisor can establish any of the following:
(a) The total of the required payments to the franchisor or an affiliate that
are made any time before to within six months after commencing operation of the
franchisee's business is less than $500, not including payment for the purchase
of reasonable amounts of inventory at bona fide wholesale prices for resale.
(b) The franchise relationship is a fractional franchise.
(c) The franchise relationship is a leased department.
(d) The franchise relationship is covered by the Petroleum Marketing Practices
Act.
(e)(1) The franchisee's estimated investment, excluding any financing received
from the franchisor or an affiliate, totals at least $1.5 million and the
prospective franchisee signs an acknowledgment verifying the grounds for the
exemption; or
(2) The franchisee is a corporation that has been in business for at least five
years and has a net worth of at least $5 million. Provided, however, that the
Commission may publish revised thresholds once every four years to adjust for
inflation.
(f) One or more purchasers of at least a 50 percent ownership interest in the
franchise are, or have been within 60 days of the sale, an officer, director,
managing agent, or an owner of at least a 25 percent interest in the franchisor,
for at least 24 months.
(g) There is no written document that describes any material term or aspect of
the relationship or arrangement.
Additional Prohibitions.
It is an unfair or deceptive act or practice in violation of section 5 of the
Federal Trade Commission Act for any franchise seller to:
(a) Make any claim or representation, orally, visually, or in writing, that
contradicts the information required to be disclosed by this Rule.
(b) Fail to return any funds or deposits in accordance with any conditions
disclosed in the franchisor's disclosure document, franchise agreement, or
related document.
(c) Fail to make available to prospective franchisees, and to the Commission
upon reasonable request, written substantiation for any financial performance
representations made in Sec. 436.5(s).
(d) Disseminate any financial performance representation to prospective
franchisees, including any representations made in the general media and
Internet, unless the franchise seller has a reasonable basis for the
representation, has written substantiation for the claim at the time the claim
is made, and the representation is included in Sec. 436.5(s) of the franchisor's
disclosure document. In conjunction with any such financial performance
representation, the franchise seller shall also:
(1) Disclose the information required by Sec. 436.5(s)(3)(ii)(E) if the
representation relates to the past performance of the franchisor's outlets; and
(2) Include a conspicuous admonition that a new franchisee's individual
financial results may differ from the result stated in the financial performance
representation.
(e) Disclaim or require a prospective franchisee to waive reliance on any
representation made in the disclosure document or its exhibits or amendments.
Provided, however, that a prospective franchisee can agree to contractual terms
and conditions that differ from those specified in a disclosure document if:
(1) the franchise seller identifies the changed terms and conditions;
(2) the prospective franchisee initials the changes; and
(3) the prospective franchisee has 5 days before signing the contract or paying
any fee to review the revised contract.
(f) Misrepresent that any person:
(1) Has purchased a franchise from the franchisor or operated a franchise of the
type offered by the franchisor; or
(2) Is able to provide an independent and reliable report about the franchise or
the experiences of any current or former franchisees.
Other Laws, Rules, Orders.
(a) The Commission does not approve or otherwise express any opinion on the
legality of any matter a franchisor may be required to disclose by this Rule.
Further, franchisors may have other obligations to disclose material information
to prospective franchisees under section 5 of the Federal Trade Commission Act.
The Commission also intends to enforce all applicable statutes and trade
regulation rules.
(b) If an outstanding FTC order applies to a franchisor but differs from any
provision of this regulation, the franchisor can petition the Commission to
amend the order.
(c) The FTC does not intend to preempt the franchise practices laws of any State
or local government, except to the extent of any inconsistency with this Rule. A
law is not inconsistent with this Rule if it affords prospective franchisees
equal or greater protection, such as registration of disclosure documents or
more extensive disclosures.
Severability.
If any provision of this regulation is stayed or held invalid, the remainder
will stay in force.
FRANCHISE DISCLOSURE ITEM 23
ITEM 23: Receipts.
(1) Include the following
detachable acknowledgment of receipt in the form set out below.
(i) State the following: This disclosure document summarizes certain provisions
of the
franchise agreement and other information in plain language. Read this
disclosure document and all agreements carefully. If [name of franchisor] offers
you a franchise, it must provide this disclosure document to you 14 days before
the earlier of:
(1) the signing of a binding agreement; or
(2) any payment to [name of franchisor or affiliate]. You must also receive a
franchise agreement containing all material terms at least 5 days before you
sign a franchise agreement. If [name of franchisor] does not deliver this
disclosure document on time or if it contains a false or misleading statement,
or a material omission, a violation of federal law and State law may have
occurred and should be reported to the Federal Trade Commission, Washington,
D.C. 20580 and [State agency].
(ii) Disclose the name, principal business address, and telephone number of any
subfranchisor or franchise broker offering the franchise.
(iii) State the issuance date.
(iv) If not disclosed in Section 436.5(a), state the name and address of the
franchisor's registered agent authorized to receive service of process.
(v) Provide the following statement: I have received a disclosure document dated
____ that included the following Exhibits:
(vi) List the title of all attached Exhibits.
(vii) Provide a space for the franchisee's signature and date.
(viii) Franchisors may include any specific instructions for returning the
receipt (e.g., street address, E-mail address, facsimile telephone number).
(2) Franchisors shall obtain a signed copy of the receipt at least 5 days before the franchise agreement is signed or the prospective franchisee pays any fee in connection with the franchise sale.
(3) For each completed franchise sale, franchisors shall retain a copy of the signed receipt for a period of at least 3 years.
The obligation to furnish documents. In connection with the offer or sale of a franchise to be located in the United States of America, its territories, or possessions, unless the transaction is exempted under the provisions of section 436.9, it is an unfair or deceptive act or practice in violation of section 5 of the Federal Trade Commission Act: (a) For any franchise seller to fail to furnish a prospective franchisee with the following documents within the following time frames. The obligations set forth in this subsection are satisfied if either the franchisor or other franchise seller furnishes the required documents to the prospective franchisee:
(1) A current disclosure document. A copy of the franchisor's current disclosure document, as described in sections 436.3-436.8, at least 14 days before the prospective franchisee signs a binding agreement or pays any fee in connection with the proposed franchise sale; and
(2) Completed franchise agreement. (a) A copy of the completed franchise agreement, and any related agreements, at least five days before the prospective franchisee signs the franchise agreement. (b) For purposes of this section, a franchise seller will be considered to have furnished the documents by the required date if a copy of the document either a paper copy or, with the consent of the prospective franchisee, an electronic copy has been delivered to the prospective franchisee by that date, or if a copy has been sent to the address specified by the prospective franchisee by first class mail at least three days prior to the specified date. Documents shall also be considered to have been furnished by the required date if a copy has been sent by electronic mail or if directions for accessing the document on the Internet have been provided to the prospective franchise by that date. (c) For any franchisor to fail to include the information and follow the instructions required by sections 436.3-436.8 in preparing the disclosure document to be furnished to prospective franchisees. Any other franchise seller shall be liable for violations of these sections if they knew or should have known of the violation.