If the relationship meets the applicable state or Federal definition of a franchise, then the franchisor must prepare a document known as the “Franchise Disclosure Document” which is commonly referred to an “FDD”. Prior to 2007, this document was called the “Uniform Franchise Offering Circular”. An FDD includes 23 sections called Items, along with numerous exhibits. The FDD must be given to prospective franchisees at least 14 days prior to signing any contract or paying any money to the franchisor or one of its affiliates.
Item 1 – The Franchisor & Any Parents, Predecessors, and Affiliates
The required disclosures under Item 1 are codified in 16 CFR 436.5(a) and require the franchisor to disclose background information on the franchisor and any of its parents, predecessors, and affiliates.
Item 2 – Business Experience
The required disclosures under Item 2 are codified in 16 CFR 436.5(b) and require disclosure of the business experience of certain individuals, including director and principal officers, for the last five years. A longer period of time is acceptable if the prior experience is directly relevant to the franchises being offered for sale.
Item 3 – Litigation
The required disclosures under Item 3 are codified in 16 CFR 436.5(c) and require disclosure of certain lawsuits involving the franchisor, entities associated with the franchisor (predecessors, parents, and affiliates), and certain lawsuits involving any person identified in Item 2.
Item 4 – Bankruptcy
The required disclosures under Item 4 are codified in 16 CFR 436.5(d) and require disclosure of any bankruptcy in the last 10 years for the franchisor, its parents, predecessors, affiliates, and any officer, general partner, or any other individual who will have management responsibility relating to the sale or operation of franchises.
Item 5 – Initial Fees
The required disclosures under Item 5 are codified in 16 CFR 436.5(e) and require all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee opens its business.
Item 6 – Other Fees
The required disclosures under Item 6 are codified in 16 CFR 436.5(f) and require all recurring or occasional fees associated with operating a franchise to be disclosed in table format. These recurring or occasional fees include royalties, advertising fees, and transfer fees, among others.
Item 7 – Estimated Initial Investment
The required disclosures under Item 7 are codified in 16 CFR 436.5(g) and require all expenses required by the franchise agreement and all other costs necessary to open the franchised business to be disclosed in a table format.
Item 8 – Restrictions on Sources of Products and Services
The required disclosures under Item 8 are codified in 16 CFR 436.5(h) and in general require the franchisor to disclose the restrictions on the franchisees to purchase or lease goods or services from the sources the franchisor prescribes. The franchisor must also disclose how the franchisor or its officers derive a benefit from those required sources.
Item 9 – Franchisee’s Obligations
The required disclosures under Item 9 are codified in 16 CFR 436.5(i) and require the franchisor to disclose the franchisee’s principal obligations in table format, including the section of the franchise agreement those obligations are found.
Item 10 – Financing
The required disclosures under Item 10 are codified in 16 CFR 436.5(j) and require the franchisor to disclose all material terms and conditions of any financing arrangements, if any are offered.
Item 11 – Franchisor’s Assistance, Advertising, Computer Systems, and Training
The required disclosures under Item 11 are codified in 16 CFR 436.5(k) and require disclosure of the franchisor’s obligations to provide assistance to franchisees under the franchise agreement, including advertising and training. The franchisor must also disclose any mandatory computer or software purchases and related costs.
Item 12 – Territory
The required disclosures under Item 12 are codified in 16 CFR 436.5(l) and require disclosure of the details concerning any assigned territories or sales restrictions.
Item 13 – Trademarks
The required disclosures under Item 13 are codified in 16 CFR 436.5(m) and require the franchisor to disclose whether its principal trademarks are registered with the United States Patent and Trademark Office (“USPTO”) as well as any pending applications, renewals, or issues which may limit the franchisee’s use of the trademarks.
Item 14 – Patents, Copyrights, and Proprietary Information
The required disclosures under Item 14 are codified in 16 CFR 436.5(n) and require disclosure of other types of intellectual property, including any patents, copyrights, and proprietary information.
Item 15 – Obligation to Participate in the Actual Operation of the Franchise Business
The required disclosures under Item 15 are codified in 16 CFR 436.5(o) and require franchisors to disclose whether the franchisees are required to participate personally in the direct operation of the franchise.
Item 16 – Restrictions on What the Franchisee May Sell
The required disclosures under Item 16 are codified in 16 CFR 436.5(p) and require disclosure of any restrictions relating to the goods or services a franchisee sells.
Item 17 – Renewal, Termination, Transfer, & Dispute Resolution
The required disclosures under Item 17 are codified in 16 CFR 436.5(q) and require franchisors to summarize the provisions of the franchise agreements dealing with termination, renewal, transfer/sale, and dispute resolution in table format.
Item 18 – Public Figures
The required disclosures under Item 18 are codified in 16 CFR 436.5(r) and require disclosure of any public figure who lends their name or likeness to the franchise, controls or manages the franchisor, or invests in the franchisor.
Item 19 – Financial Performance Representations
The required disclosures under Item 19 are codified in 16 CFR 436.5(s) and in general if a franchisor makes financial performance representations, they must disclose such in the FDD. For franchisors that do make financial performance representations, they must have a reasonable basis and written substantiation for them.
Item 20 – Outlets and Franchisee Information
The required disclosures under Item 20 are codified in 16 CFR 436.5(t) and require various disclosures of the statistical information on the number of franchises and company owned outlets for the last three years, including state by state information and status changes.
Item 21 – Financial Statements
The required disclosures under Item 21 are codified in 16 CFR 436.5(u) and require franchisors to include copies of their audited financial statements for the last three years to show the franchisor’s financial condition.
Item 22 – Contracts
The required disclosures under Item 22 are codified in 16 CFR 436.5(v) and require franchisors to attach a copy of all agreements relating to the franchise. This includes the franchise agreement, leases, options, financing agreements, non-compete agreements, guarantees of performance, and more.
Item 23 – Receipt
The required disclosures under Item 23 are codified in 16 CFR 436.5(w) and require franchisors to obtain a signed receipt for the disclosure document furnished to the franchisee.
For more detailed information on each of these Items, please see the FTC’s Franchise Rule Compliance Guide found here: bus70-franchise-rule-compliance-guide.pdf (ftc.gov)