As a franchisee, you must ensure that you have enough capital to cover the startup expenses of opening a franchise business (i.e., initial fees, equipment, inventory, etc). What’s more, you must put aside a sufficient amount of funds to cover your cost of living in these first few months or so. Luckily, information regarding financial arrangements may be made available within Item 10 of your franchise disclosure document (FDD). Continue reading to learn what contents to expect within Item 10 of the FDD and how one of the experienced franchise law attorneys at FortmanSpann, LLC can help you in interpreting this document.
What is within Item 10 of the Franchise Disclosure Document?
To reiterate, a franchisee must fully understand the financing programs at their disposal before making this weighty investment decision. This is why, within Item 10 of the FDD, a franchisor must disclose every direct and indirect financing offer they, or their agents or affiliates, may provide to their franchisees. Direct financing offers may pertain to leases and installment contracts. Meanwhile, the Federal Trade Commission defines indirect financing as:
“[Offers of financing that] 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.”
What are other considerations for this item?
Of note, federal franchise law holds that 10 disclosures are required within Item 10. They are as follows:
- The startup expenses that may be covered by a financing program (i.e., initial fees, equipment, inventory, etc).
- The individual who will be covering these startup expenses and their relationship to the franchisor (i.e., agent, affiliate, etc).
- The amount of financial coverage that may be offered with the program (i.e., actual cost or percentage).
- The annual interest rate and finance charges with the program.
- The number and period of required repayments with the program.
- Whether there is a required security interest by the franchisor.
- Whether anyone besides the franchisee can guarantee the debt.
- Whether the franchisee can have debt be prepaid.
- Whether the franchisee can incur liabilities in the event of default (i.e., accelerated obligations to pay the full amount, obligations to pay court costs or attorney’s fees, etc).
- Any other financial terms and conditions that are to be imposed on the franchisee.
With this, federal franchise law does not enforce a specific formatting requirement for Item 10. Though, this item is commonly presented in a tabular format to ensure organization and clarity.
At the end of the day, if you are dealing with an FDD, then you need one of the skilled franchise law attorneys by your side. Contact FortmanSpann, LLC to retain our services today.