436.5—Disclosure items.
(1)
The name and principal business address of the franchisor; any parents; and any affiliates that offer franchises in any line of business or provide products or services to the franchisees of the franchisor.
(2)
The name and principal business address of any predecessors during the 10-year period immediately before the close of the franchisor's most recent fiscal year.
(5)
The type of business organization used by the franchisor (for example, corporation, partnership) and the state in which it was organized.
(iv)
The general market for the product or service the franchisee will offer. In describing the general market, consider factors such as whether the market is developed or developing, whether the goods will be sold primarily to a certain group, and whether sales are seasonal.
(v)
In general terms, any laws or regulations specific to the industry in which the franchise business operates.
(7)
The prior business experience of the franchisor; any predecessors listed in § 436.5(a)(2) of this part; and any affiliates that offer franchises in any line of business or provide products or services to the franchisees of the franchisor, including:
(ii)
The length of time each has offered franchises providing the type of business the franchisee will operate.
(b) Item 2:
Business Experience. Disclose by name and position the franchisor's directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered by this document. For each person listed in this section, state his or her principal positions and employers during the past five years, including each position's starting date, ending date, and location.
(c) Item 3:
Litigation. (1) Disclose whether the franchisor; a predecessor; a parent or affiliate who induces franchise sales by promising to back the franchisor financially or otherwise guarantees the franchisor's performance; an affiliate who offers franchises under the franchisor's principal trademark; and any person identified in § 436.5(b) of this part :
(A)
An administrative, criminal, or material civil action alleging a violation of a franchise, antitrust, or securities law, or alleging fraud, unfair or deceptive practices, or comparable allegations.
(B)
Civil actions, other than ordinary routine litigation incidental to the business, which are material in the context of the number of franchisees and the size, nature, or financial condition of the franchise system or its business operations.
(ii)
Was a party to any material civil action involving the franchise relationship in the last fiscal year. For purposes of this section, “franchise relationship” means contractual obligations between the franchisor and franchisee directly relating to the operation of the franchised business (such as royalty payment and training obligations). It does not include actions involving suppliers or other third parties, or indemnification for tort liability.
(B)
Been held liable in a civil action involving an alleged violation of a franchise, antitrust, or securities law, or involving allegations of fraud, unfair or deceptive practices, or comparable allegations. “Held liable” means that, as a result of claims or counterclaims, the person must pay money or other consideration, must reduce an indebtedness by the amount of an award, cannot enforce its rights, or must take action adverse to its interests.
(2)
Disclose whether the franchisor; a predecessor; a parent or affiliate who guarantees the franchisor's performance; an affiliate who has offered or sold franchises in any line of business within the last 10 years; or any other person identified in § 436.5(b) of this part is subject to a currently effective injunctive or restrictive order or decree resulting from a pending or concluded action brought by a public agency and relating to the franchise or to a Federal, State, or Canadian franchise, securities, antitrust, trade regulation, or trade practice law.
(3)
For each action identified in paragraphs (c)(1) and (2) of this section, state the title, case number or citation, the initial filing date, the names of the parties, the forum, and the relationship of the opposing party to the franchisor (for example, competitor, supplier, lessor, franchisee, former franchisee, or class of franchisees). Except as provided in paragraph (c)(4) of this section, summarize the legal and factual nature of each claim in the action, the relief sought or obtained, and any conclusions of law or fact. 1 In addition, state:
Code of Federal Regulations
Footnote(s): 1 Franchisors may include a summary opinion of counsel concerning any action if counsel consent to use the summary opinion and the full opinion is attached to the disclosure document.
(ii)
For prior actions, the date when the judgment was entered and any damages or settlement terms. 2
Code of Federal Regulations
Footnote(s): 2 If a settlement agreement must be disclosed in this Item, all material settlement terms must be disclosed, whether or not the agreement is confidential. However, franchisors need not disclose the terms of confidential settlements entered into before commencing franchise sales. Further, any franchisor who has historically used only the Franchise Rule format, or who is new to franchising, need not disclose confidential settlements entered prior to the effective date of this Rule.
(iii)
For injunctive or restrictive orders, the nature, terms, and conditions of the order or decree.
(iv)
For convictions or pleas, the crime or violation, the date of conviction, and the sentence or penalty imposed.
(4)
For any other franchisor-initiated suit identified in paragraph (c)(1)(ii) of this section, the franchisor may comply with the requirements of paragraphs (c)(3)(i) through (iv) of this section by listing individual suits under one common heading that will serve as the case summary (for example, “royalty collection suits”).
(d) Item 4:
Bankruptcy. (1) Disclose whether the franchisor; any parent; predecessor; affiliate; officer, or general partner of the franchisor, or any other individual who will have management responsibility relating to the sale or operation of franchises offered by this document, has, during the 10-year period immediately before the date of this disclosure document:
(i)
Filed as debtor (or had filed against it) a petition under the United States Bankruptcy Code (“Bankruptcy Code”).
(iii)
Been a principal officer of a company or a general partner in a partnership that either filed as a debtor (or had filed against it) a petition under the Bankruptcy Code, or that obtained a discharge of its debts under the Bankruptcy Code while, or within one year after, the officer or general partner held the position in the company.
(ii)
Whether the debtor is the franchisor. If not, state the relationship of the debtor to the franchisor (for example, affiliate, officer).
(iii)
The date of the original filing and the material facts, including the bankruptcy court, and the case name and number. If applicable, state the debtor's discharge date, including discharges under Chapter 7 and confirmation of any plans of reorganization under Chapters 11 and 13 of the Bankruptcy Code.
(3)
Disclose cases, actions, and other proceedings under the laws of foreign nations relating to bankruptcy.
(e) Item 5:
Initial Fees. Disclose the initial fees and any conditions under which these fees are refundable. If the initial fees are not uniform, disclose the range or formula used to calculate the initial fees paid in the fiscal year before the issuance date and the factors that determined the amount. For this section, “initial fees” means all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee's business opens, whether payable in lump sum or installments. Disclose installment payment terms in this section or in § 436.5(j) of this part.
(f) Item 6:
Other Fees. Disclose, in the following tabular form, all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party. State the title “OTHER FEES ” in capital letters using bold type. Include any formula used to compute the fees. 3
Code of Federal Regulations
Footnote(s): 3 If fees may increase, disclose the formula that determines the increase or the maximum amount of the increase. For example, a percentage of gross sales is acceptable if the franchisor defines the term “gross sales.”
| OTHER FEES | |||
| Column 1Type of fee | Column 2Amount | Column 3Due Date | Column 4Remarks |
|---|---|---|---|
(1)
In column 1, list the type of fee (for example, royalties, and fees for lease negotiations, construction, remodeling, additional training or assistance, advertising, advertising cooperatives, purchasing cooperatives, audits, accounting, inventory, transfers, and renewals).
(4)
In column 4, include remarks, definitions, or caveats that elaborate on the information in the table. If remarks are long, franchisors may use footnotes instead of the remarks column. If applicable, include the following information in the remarks column or in a footnote:
(iii)
Whether the fees are non-refundable or describe the circumstances when the fees are refundable.
(v)
The voting power of franchisor-owned outlets on any fees imposed by cooperatives. If franchisor-owned outlets have controlling voting power, disclose the maximum and minimum fees that may be imposed.
(g) Item 7:
Estimated Initial Investment. Disclose, in the following tabular form, the franchisee's estimated initial investment. State the title “YOUR ESTIMATED INITIAL INVESTMENT ” in capital letters using bold type. Franchisors may include additional expenditure tables to show expenditure variations caused by differences such as in site location and premises size.
| YOUR ESTIMATED INITIAL INVESTMENT | ||||
| Column 1Type of expenditure | Column 2Amount | Column 3Method of payment | Column 4When due | Column 4To whom payment is to be made |
|---|---|---|---|---|
| Total. | ||||
(i)
List each type of expense, beginning with pre-opening expenses. Include the following expenses, if applicable. Use footnotes to include remarks, definitions, or caveats that elaborate on the information in the Table.
(D)
Equipment, fixtures, other fixed assets, construction, remodeling, leasehold improvements, and decorating costs, whether purchased or leased.
(ii)
List separately and by name any other specific required payments (for example, additional training, travel, or advertising expenses) that the franchisee must make to begin operations.
(iii)
Include a category titled “Additional funds— [initial period]” for any other required expenses the franchisee will incur before operations begin and during the initial period of operations. State the initial period. A reasonable initial period is at least three months or a reasonable period for the industry. Describe in general terms the factors, basis, and experience that the franchisor considered or relied upon in formulating the amount required for additional funds.
(2)
In column 2, state the amount of the payment. If the amount is unknown, use a low-high range based on the franchisor's current experience. If real property costs cannot be estimated in a low-high range, describe the approximate size of the property and building and the probable location of the building (for example, strip shopping center, mall, downtown, rural, or highway).
(i)
Whether each payment is non-refundable, or describe the circumstances when each payment is refundable.
(ii)
If the franchisor or an affiliate finances part of the initial investment, the amount that it will finance, the required down payment, the annual interest rate, rate factors, and the estimated loan repayments. Franchisors may refer to § 436.5(j) of this part for additional details.
(h) Item 8:
Restrictions on Sources of Products and Services. Disclose the franchisee's obligations to purchase or lease goods, services, supplies, fixtures, equipment, inventory, computer hardware and software, real estate, or comparable items related to establishing or operating the franchised business either from the franchisor, its designee, or suppliers approved by the franchisor, or under the franchisor's specifications. Include obligations to purchase imposed by the franchisor's written agreement or by the franchisor's practice. 4 For each applicable obligation, state:
Code of Federal Regulations
Footnote(s): 4 Franchisors may include the reason for the requirement. Franchisors need not disclose in this Item the purchase or lease of goods or services provided as part of the franchise without a separate charge (such as initial training, if the cost is included in the franchise fee). Describe such fees in Item 5 of this section. Do not disclose fees already described in § 436.5(f) of this part.
(2)
Whether the franchisor or its affiliates are approved suppliers or the only approved suppliers of that good or service.
(ii)
Whether the franchisor permits franchisees to contract with alternative suppliers who meet the franchisor's criteria.
(5)
Whether the franchisor issues specifications and standards to franchisees, subfranchisees, or approved suppliers. If so, describe how the franchisor issues and modifies specifications.
(6)
Whether the franchisor or its affiliates will or may derive revenue or other material consideration from required purchases or leases by franchisees. If so, describe the precise basis by which the franchisor or its affiliates will or may derive that consideration by stating:
Code of Federal Regulations
Footnote(s): 5 Take figures from the franchisor's most recent annual audited financial statement required in § 436.5(u) of this part. If audited statements are not yet required, or if the entity deriving the income is an affiliate, disclose the sources of information used in computing revenues.
(iv)
If the franchisor's affiliates also sell or lease products or services to franchisees, the affiliates' revenues from those sales or leases.
(7)
The estimated proportion of these required purchases and leases by the franchisee to all purchases and leases by the franchisee of goods and services in establishing and operating the franchised businesses.
(8)
If a designated supplier will make payments to the franchisor from franchisee purchases, disclose the basis for the payment (for example, specify a percentage or a flat amount). For purposes of this disclosure, a “payment” includes the sale of similar goods or services to the franchisor at a lower price than to franchisees.
(10)
Whether the franchisor negotiates purchase arrangements with suppliers, including price terms, for the benefit of franchisees.
(11)
Whether the franchisor provides material benefits (for example, renewal or granting additional franchises) to a franchisee based on a franchisee's purchase of particular products or services or use of particular suppliers.
(i) Item 9:
Franchisee's Obligations. Disclose, in the following tabular form, a list of the franchisee's principal obligations. State the title “FRANCHISEE'S OBLIGATIONS ” in capital letters using bold type. Cross-reference each listed obligation with any applicable section of the franchise or other agreement and with the relevant disclosure document provision. If a particular obligation is not applicable, state “Not Applicable.” Include additional obligations, as warranted.
| FRANCHISEE'S OBLIGATIONS | ||
| [In bold] This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this disclosure document. | ||
| Obligation | Section in agreement | Disclosure document item |
|---|---|---|
| a. Site selection and acquisition/lease | ||
| b. Pre-opening purchase/leases | ||
| c. Site development and other pre-opening requirements | ||
| d. Initial and ongoing training | ||
| e. Opening | ||
| f. Fees | ||
| g. Compliance with standards and policies/operating manual | ||
| h. Trademarks and proprietary information | ||
| i. Restrictions on products/services offered | ||
|
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|
||
| j. Warranty and customer service requirements | ||
| k. Territorial development and sales quotas | ||
| l. Ongoing product/service purchases | ||
| m. Maintenance, appearance, and remodeling requirements | ||
| n. Insurance | ||
| o. Advertising | ||
| p. Indemnification | ||
| q. Owner's participation/management/staffing | ||
| r. Records and reports | ||
| s. Inspections and audits | ||
| t. Transfer | ||
| u. Renewal | ||
| v. Post-termination obligations | ||
| w. Non-competition covenants | ||
| x. Dispute resolution | ||
| y. Other (describe) | ||
(j) Item 10:
Financing. (1) Disclose the terms of each financing arrangement, including leases and installment contracts, that the franchisor, its agent, or affiliates offer directly or indirectly to the franchisee. 6 The franchisor may summarize the terms of each financing arrangement in tabular form, using footnotes to provide additional information. For a sample Item 10 table, see appendix A of this part. For each financing arrangement, state:
Code of Federal Regulations
Footnote(s): 6 Indirect offers of financing 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.
(i)
What the financing covers (for example, the initial franchise fee, site acquisition, construction or remodeling, initial or replacement equipment or fixtures, opening or ongoing inventory or supplies, or other continuing expenses). 7
Code of Federal Regulations
Footnote(s): 7 Include sample copies of the financing documents as an exhibit to § 436.5(v) of this part. Cite the section and name of the document containing the financing terms and conditions.
(ii)
The identity of each lender providing financing and their relationship to the franchisor (for example, affiliate).
(iii)
The amount of financing offered or, if the amount depends on an actual cost that may vary, the percentage of the cost that will be financed.
(iv)
The rate of interest, plus finance charges, expressed on an annual basis. If the rate of interest, plus finance charges, expressed on an annual basis, may differ depending on when the financing is issued, state what that rate was on a specified recent date.
(D)
Liabilities from cross defaults such as those resulting directly from non-payment, or indirectly from the loss of business property.
(2)
Disclose whether the loan agreement requires franchisees to waive defenses or other legal rights (for example, confession of judgment), or bars franchisees from asserting a defense against the lender, the lender's assignee or the franchisor. If so, describe the relevant provisions.
(3)
Disclose whether the franchisor's practice or intent is to sell, assign, or discount to a third party all or part of the financing arrangement. If so, state:
(i)
The assignment terms, including whether the franchisor will remain primarily obligated to provide the financed goods or services; and
(ii)
That the franchisee may lose all its defenses against the lender as a result of the sale or assignment.
(4)
Disclose whether the franchisor or an affiliate receives any consideration for placing financing with the lender. If such payments exist:
(ii)
Identify the source of the payment and the relationship of the source to the franchisor or its affiliates.
(k) Item 11: Franchisor's Assistance, Advertising, Computer Systems, and Training.
Disclose the franchisor's principal assistance and related obligations of both the franchisor and franchisee as follows. For each obligation, cite the section number of the franchise agreement imposing the obligation. Begin by stating the following sentence in bold type: “Except as listed below, [the franchisor] is not required to provide you with any assistance. ”
(1)
Disclose the franchisor's pre-opening obligations to the franchisee, including any assistance in:
(i)
Locating a site and negotiating the purchase or lease of the site. If such assistance is provided, state:
(B)
Whether the franchisor selects the site or approves an area in which the franchisee selects a site. If so, state further whether and how the franchisor must approve a franchisee-selected site.
(C)
The factors that the franchisor considers in selecting or approving sites (for example, general location and neighborhood, traffic patterns, parking, size, physical characteristics of existing buildings, and lease terms).
(D)
The time limit for the franchisor to locate or approve or disapprove the site and the consequences if the franchisor and franchisee cannot agree on a site.
(ii)
Conforming the premises to local ordinances and building codes and obtaining any required permits.
(v)
Providing for necessary equipment, signs, fixtures, opening inventory, and supplies. If any such assistance is provided, state:
(A)
Whether the franchisor provides these items directly or only provides the names of approved suppliers.
(2)
Disclose the typical length of time between the earlier of the signing of the franchise agreement or the first payment of consideration for the franchise and the opening of the franchisee's business. Describe the factors that may affect the time period, such as ability to obtain a lease, financing or building permits, zoning and local ordinances, weather conditions, shortages, or delayed installation of equipment, fixtures, and signs.
(3)
Disclose the franchisor's obligations to the franchisee during the operation of the franchise, including any assistance in:
(v)
Establishing and using administrative, bookkeeping, accounting, and inventory control procedures.
(C)
The source of the advertising (for example, an in-house advertising department or a national or regional advertising agency).
(D)
Whether the franchisor must spend any amount on advertising in the area or territory where the franchisee is located.
(ii)
The circumstances when the franchisor will permit franchisees to use their own advertising material.
(iii)
Whether there is an advertising council composed of franchisees that advises the franchisor on advertising policies. If so, disclose:
(B)
Whether the council serves in an advisory capacity only or has operational or decision-making power.
(iv)
Whether the franchisee must participate in a local or regional advertising cooperative. If so, state:
(B)
How much the franchisee must contribute to the fund and whether other franchisees must contribute a different amount or at a different rate.
(C)
Whether the franchisor-owned outlets must contribute to the fund and, if so, whether those contributions are on the same basis as those for franchisees.
(D)
Who is responsible for administering the cooperative (for example, franchisor, franchisees, or advertising agency).
(E)
Whether cooperatives must operate from written governing documents and whether the documents are available for the franchisee to review.
(F)
Whether cooperatives must prepare annual or periodic financial statements and whether the statements are available for review by the franchisee.
(G)
Whether the franchisor has the power to require cooperatives to be formed, changed, dissolved, or merged.
(B)
How much the franchisee must contribute to the fund and whether other franchisees must contribute a different amount or at a different rate.
(C)
Whether the franchisor-owned outlets must contribute to the fund and, if so, whether it is on the same basis as franchisees.
(G)
How the funds were used in the most recently concluded fiscal year, including the percentages spent on production, media placement, administrative expenses, and a description of any other use.
(vi)
If not all advertising funds are spent in the fiscal year in which they accrue, how the franchisor uses the remaining amount, including whether franchisees receive a periodic accounting of how advertising fees are spent.
(vii)
The percentage of advertising funds, if any, that the franchisor uses principally to solicit new franchise sales.