30 Years Of Business Law Experience

Questions For Franchisors To Develop The Disclosure Document

On Behalf of | Feb 15, 2023 | Franchise Law |

The following is a list of information that will be helpful to me to prepare a Uniform Franchise Disclosure (“FDD”) for your business to be franchised. You may want to meet with me before you attempt to answer the following questions especially if you are new to franchising. Or you may want to work on the list and then meet with me to go through it in more detail. A. FDD – ITEMS 1 – 23
The following are short summaries of what information will be required under each of the 23 Items in the disclosure portion of the UFOC. There will be much more detail required but the following will provide some basic questions and instructions which will help in developing of the documents

  1. The Franchisor, its Predecessors and Affiliates.
    Describe the basic information about the franchisor such as when it was formed and any other special information. Then describe any predecessors to the franchisor and any related companies that will be involved in the franchise business.
  2. Business Experience.
    Describe your officers, directors and any other employees that will have a role in the operation of your business or will be in involved in selling franchises. The UFOC will require a short statement about the experience (prior five years) of each of these people but it is not necessary to prepare it now. You should look at examples to see the type of content needed.
  3. Litigation.
    Describe any litigation that the franchisor is involved with now or in the past.
  4. Bankruptcy.
    Describe any bankruptcy (domestic or foreign) by the franchisor, its affiliate, its predecessor or any officer or director of the franchisor during the last ten years.
  5. Initial Franchise Fee; Royalty and Advertising Fee.
    Summarize what you think your initial upfront franchise fee will be to purchase a new franchise. Then estimate what your royalty will be and advertising fee(s). The advertising fees often consist of national, regional and local (and/or sometimes local co-ops). Also consider events that might trigger the termination of the franchise and whether there will be any refund of all or part (or none) of the franchise fee. Some of these events are the failure to satisfactorily complete training or acquire a site or open within certain periods of time.
  6. Other Fees.
    Describe any other fees that may be charged to the franchisee such as assistance with construction, remodeling, additional training, advertising, group advertising, special assistance with operations, audits caused by a franchise who is delinquent any payment, a transfer fee for a sale or renewal. A detailed chart is required for this section but you will not quite have to be that detailed at this point, unless you are able to.
  7. Franchisee’s Initial Investment.
    You will need to list all the items that a franchisee will need to acquire and their cost to start business. This will include items such as the initial franchise fee, expenses to attend training, real property lease, equipment purchase or leases, signs, opening costs, inventory, advertising, and additional operating funds. You will also need to estimate at least three (3) months of operating capital.
  8. Restrictions on Sources of Products and Services.
    Consider if the franchisee must buy products, services or equipment from the franchisor or from approved suppliers. The regulatory agency is looking for what income you might receive.
  9. Franchisee’s Obligations.
    The Franchisee’s obligations usually cover similar items among different franchises. Consider whether there are any special arrangements you may want, in addition to the following: site selection, leasing, pre opening purchases, site development, pre opening requirements, initial and ongoing training, the opening, compliance with the manual, compliance with trademarks, restrictions on products and services sold, warranty and customer service requirements, territorial developments and sales quotas, ongoing product and service purchases, maintenance, appearance and remodeling requirements, insurance, advertising, owner’s participation in the management and staffing, records and reports, inspections and audits by you, transfer and renewal of the franchise, post-termination obligations, non competition covenants, dispute resolution, (e.g. arbitration), etc.
  10. Financing.
    Describe whether you plan to provide franchisees with financing and if so, the estimated amount and terms. Most franchisors do not provide financing.
  11. Franchisor’s Obligations.
    This provision will be quite detailed. Do not get too concerned if you cannot address all of these topics in detail at this point. The following are some of the main items:
    1. 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.
    2. The obligations that the franchisor will perform before the franchise business opens.
    3. The methods/criteria used by the franchisor to approve the site selected by the franchisee.
    4. The obligations to be met by the franchisor during operation of the franchised business

    You will also have to prepare a chart showing the training courses, the estimated duration of each and the instructor(s).

  12. Territory.
    1. Describe any exclusive territory that will be granted. (i) Describe whether you have considered using your trademark for any other type of business; (the term “encroachment” is where the franchisor is operating in such a way that may be competing directly or indirectly with the franchisee); (ii) Consider if you intend to use your trademark to sell products or services in different markets or use a different trademark for sale of similar products or services of the franchise system; (iii) Usually the franchisor tries to reserve as much area as possible regarding its ability to operate a similar business or use other channels of distribution without raising too much concern regarding encroachment.
  13. Trademarks.
    Provide a brief description of your trademarks including names, dates of filing, registration numbers and where they are filed (whether on the Principal or Supplemental Register). Are there any claims against the marks which are active at this point? Describe any limitation on the use of the marks affecting you or the franchisee.
  14. Patents, Copyrights and Proprietary Information.
    Describe if you have any of these intangible rights or property. The term “Proprietary Information” is broad and can include confidential information, trade secrets and so forth.
  15. Obligation to Participate in the Actual Operation of the Franchised Business.
    Must the individual franchisee operate the store or can they use managers? What other variations might you allow?
  16. Restrictions on What Franchisee May Sell.
    This is self-explanatory.
  17. Renewal, Termination, Transfer and Dispute Resolution.
    If you have any thoughts on these, put them down, otherwise we can discuss them since they are somewhat technical.
  18. Public Figures.
    Describe whether you are going to use any famous or public individuals to advertise the business or the sale of franchises.
  19. Earnings, Claims.
    Discuss whether you want to disclose past earnings and why. This should only be made when you have a reasonable track record and representative figures for the same business as the franchisees will operate. You must proceed with care in disclosing any operational information, as the majority of franchisors do not use this opportunity for fear of claims.
  20. List of outlets.
    Describe the location and type of business you or your affiliate (each outlet) now own. Describe any prior outlets that have been sold, transferred or terminated (by you or your affiliate) and any special issues about them or about existing outlets. If you are an existing franchisor, you will need to list all franchised outlets on several charts.
  21. Financial Statements.
    Determine if you are going to use one of your existing corporations to be the franchisor or start a new entity. Most owners start a new entity in order to protect against any franchise claims that might be made against their more valuable existing corporation and to keep their audit cost lower. I have found that some financial statement auditors can be slow in preparing the required audit and may delay the filing of initial or renewal applications. Talk with your auditor about your timing. They usually get buried in work after January 25. Unless your entity already has a fiscal year end, consider what you might want as a year end.
  22. Contracts.
    This requires listing all the contracts that are included in the FDD which the franchisee must sign. This usually includes the franchise agreement, release agreement, confidentiality and non-compete agreements, computer software lease, ETF bank authorization, phone transfer agreements, etc. These contracts make up only a part of the exhibits.
  23. Receipt.
    This is the last page in the FDD and contains some basic information about the timing of receipt of the FDD by the franchisee and related information. No action is necessary by you at this time for this item.

B. SUPPLEMENTAL INFORMATION SECTION.
There is an additional question on the “supplemental information” form to the application for registration that requires the franchisor to determine its cost for performing its pre‑opening obligations to provide goods or services in connection with establishing the franchise, which includes real estate, improvements, equipment, inventory, training, and other items in the offering. You must state separately the source of all required funds necessary to pay for these items. The purpose of this question is to determine whether you are financially able to provide the services necessary for a franchisee to open a store. If you are not, then the regulator will make you “impound” the initial franchise fee and only release it after the business is open. You do not have to answer this question now, but think about the money you will need to provide, the services and any products to fulfill your obligations to the point of the business being opened.

C. SALES
Consider what you need to do to have an effective sales campaign for your franchises (not the products or services of the business.) Will your officers and/or employees be involved in selling? Will you contract any brokers? Also consider any advertisements or the methods of distributing your information such as web sites, web advertising or other more traditional locations. Then try to estimate their costs. This can often be the most important challenge.

D. DIRECT CONTACT
Consider how you will make contact with the franchisees in the sales process such as: (i) methods to screen candidates; (ii) sales presentations, (iii) Discovery Day, (iv) advertising, (v) direct conversations, (vi) websites and other methods of contacting franchisees. As part of your facility requirements, consider where you will provide training and where you might hold Discovery Day.

E. SYSTEMS & OPERATIONS MANUAL
You will need to create an Operations Manual which usually describes the comprehensive standards for the day to day operations of the business. You do not actually have to have the manual finalized when we file with the regulatory agency but you must have an outline.

F. YOUR EXPENSES

Consider how much capital you are going to need for various obligations over certain time periods. For example, consider FDD development and registration, first sales, openings, ongoing support. Also consider your sources of capital such as independent lenders, franchise fees and royalties. Develop a spreadsheet.

G. AREA DEVELOPERS
You should consider whether your franchises will be sold with the help of an area developer. This may be a Franchise who opens several units in a given area or a franchise who sells units in an area for the franchisor’s benefit. Write out all the things that you expect to achieve with an area developer. This term may also be referred to as “Master Developer”, “Development Franchise”, “Area Representative”, or other variations which can have different meaning. Describe the fees they will earn and especially the services and obligations they will perform. We will need to consider if this approach will result in the system being regulated as a “sub‑franchise” which you normally will want to avoid.

H. IMPOUND
Very important restriction that the regulators can impose and they will consider your cost to open a franchisee’s unit, your short term assets (cash, CD’s, etc.) and your projection of the number of units you expect to sell in the upcoming year.