Item 15 of the Franchise Disclosure Document (FDD) provides prospective franchisees with an expectation of the time they will have to devote to personally operating, managing, and supervising the franchised business. Under Item 15, the franchisor is required to disclose the duties and limits on the franchisee’s direct involvement, management, and supervision of the franchised business. The types of duties and limits that require disclosure are those found in signed franchisor-franchisee agreements, as well as those duties performed and limits recognized as a matter of custom in the franchisor’s business practice. Our skilled attorneys could discuss what information a franchisor must disclose in this item and the format the disclosures must take, as well as the best practices for artfully drafting such disclosures, under Item 15 of the FDD.
The disclosure requirements for Item 15 of the FDD are set forth under 16 C.F.R § 436.5(o), and they pertain to the requisite level of franchisee involvement required in the operation in the franchise. Under Item 15, franchisors must first disclose what the franchisee’s duties are, in a written agreement or in practice, to participate personally in the direct operation of the franchised business. For a franchisor that imposes no such duties, it must at least disclose whether it encourages such participation. For franchisors that do not require on-the-premises supervision by the franchisee, and if the franchisee is an individual person, the franchisor must disclose:
If the franchisee is not an individual but operates as corporation, partnership, or some other form of business entity, the franchisor must also disclose the amount of equity interest in the franchise, if any, that the on-premises supervisor must own.
The FTC Rule also requires franchisors to disclose the restrictions that a franchisee must enforce against the manager of the franchised business. These typically include restrictions such as trade secret agreements, confidentiality agreements, non-compete agreements, and guarantees. If a franchisee or manager is required to sign any agreements with the franchisor before the business opens, the franchisor must reference those agreements under Item 22 and attach copies of those agreements as exhibits to the FDD. Although these are not technically required under Item 15, if the franchisee is a legal entity, most franchisors also disclose whether a franchisor will require a guaranty from the franchisee’s owners, shareholders, members, or partners, and their respective spouses.
Almost all franchisors require their franchisees to participate to some degree in the operation of the franchised business. Item 15 gives prospective franchisees an idea of how much of their time and effort must be devoted to the business. Therefore, it is best to use clear and concise language in Item 15, so that prospective franchisees can readily determine the ultimate question: whether the franchisor will require active franchisee involvement, or whether the franchisee can hire managers to assume certain responsibilities. It is best practice to present these duties and limits imposed on the franchisee in a feasible manner, so as to not dissuade franchisees from investing in the business out of fear of being too actively involved. Also, it is wise for franchisors to keep in mind that if they negotiate with a franchisee to modify a duty or limit, there may be additional state disclosures required. Consulting with a seasoned franchise attorney is a great way to ensure the franchisee’s duties and limits in managing the franchise are painted clearly, accurately, and in the best possible light in Item 15 of the franchise disclosure document.