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This is the eighth in a series of articles for prospective franchisees that discuss the components of a franchise disclosure document. Unlike almost all other articles about what you will learn in a franchise disclosure document, however, this series will focus on what you may not learn. This focus is intended to help you both refine and expand your due diligence efforts.
Item 16 is pretty simple and direct: a franchisor must disclose any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit access to customers. Apparently, all participants in the rulemaking process for the new Franchise Rule back in the mid-2000s agreed that Item 16 is uncomplicated as none raised any concerns or submitted any comments. There's a pretty short list of franchise disclosure document (FDD) items that received such a collective yawn: the only other item getting the "no comment" treatment was Item 14 (Patents, copyrights and proprietary information).
A prospective franchisee would be making a huge mistake, however, by letting its ho-hum history and veneer mask the importance of Item 16 disclosures.
What you will learn.
Among the specific disclosure requirements are
What you will not learn.
Note that these disclosure requirements conspicuously fail to mention costs. But the costs of sales restrictions can be very real and quite material. You need to think about the costs associated with, among other things
Regarding the last of these examples, a typical Item 16 disclosure reads "We have the right to change the types of [franchisor] products and services and there are no limits on our right to do so." Read that again just in case the italics distracted you. There are no limits. That means, literally if not practically, that there are no limits to the additional costs you may incur for franchisor-imposed changes. Some but not nearly all franchisors are gracious enough to agree to provide you with written notice before any changes become effective. Very few, if any, will tell you how these changes will affect your bottom line.
Your franchise attorney should ask for some limitation on your cost exposure. The Federal Trade Commission's Franchise Rule Compliance Guide provides an example of some limiting language in its sample Item 16. But don't expect much of if any accommodation. Even if the odds are against any limits, however, there's a 100% chance that the answer will be "no" if you don't ask for any.
Mike Sheehan is a franchise consultant and attorney. He is the president of Focus Ventures (www.focusonfranchise.com) and formerly served as a securities attorney and as general counsel for a Fortune 100 financial services company. His Franchise Focus Blog (www.franchisefocus.blogspot.com) focuses on helpful information, tips and current news for prospective franchisees.
This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult your own franchise attorney concerning your own situation and any specific legal questions you may have.
© 2012 Mike Sheehan. All rights reserved.