Within Item 15, the franchisor must disclose what obligations, if any, the individual franchisees or franchisee owners must have in the day-to-day operations of the franchised business, including whether or not they must work in the franchised business on a full-time basis.
When it comes to owning a franchise, there are often misconceptions about the amount of work necessary to be successful.
Although franchises are based on proven systems with extensive track records of success, operating a franchised business still requires a commitment of time and effort on the part of the franchisee. Since every prospective franchisee’s lifestyle and goals are different, however, they should fully understand what will be expected of them before investing in a franchise. Because of its role in describing a franchisee’s business participation obligations, Item 15 of the Franchise Disclosure Document (FDD) can be a valuable tool for making sure candidates are aware of their future obligations as franchisees before closing a sale.
Below, we’ll discuss the information and obligations that franchisors must disclose to prospective franchisees in Item 15 before selling a franchise.
What Information Must Be Disclosed in Item 15?
Under the federal Franchise Rule, franchisors must disclose the franchisee's “obligation to participate personally in the direct operation of the franchisee's business and whether the franchisor recommends participation” in Item 15 of the FDD. This should include any franchisee obligations related to written agreements as well as those related to the franchisor’s customary business practices.
The obligations disclosed in Item 15 typically include, but aren’t limited to, the amount of time a franchisee will be expected to be directly involved in the operations of the franchised business, including managing and supervising staff. Generally, these obligations are outlined in the franchise agreement, but additional obligations may need to be disclosed in Item 15 based on the franchisor’s business practices.
According to 16 CFR § 436.5(o), in situations where personal “on-premises” supervision is not required of franchisees, franchisors must disclose whether they recommend on-premises supervision by an individual franchisee in Item 15. Franchisors must also disclose limitations placed on the individuals franchisees may hire to supervise the franchised business on-premises, and whether completion of the franchisor’s training program is required of on-premises supervisors.
In situations where franchisees are a business entity, franchisors must disclose the amount of equity interest that on-premises supervisors must have in the franchised business (if applicable) in Item 15.
In addition to participation obligations, franchisors must disclose any restrictions franchisees are required to place on the managers of the franchised business in Item 15. These disclosures can include confidentiality, nondisclosure of trade secrets, non-competition agreements or other similar restrictions.
Although the commitments disclosed in Item 15 are sometimes negotiable, franchisors should be aware that any modification to the obligations and limitations described in Item 15 may create the requirement for additional disclosures depending on the location of the franchised business. Because of that, it’s important to work with an experienced franchise attorney when preparing, reviewing or negotiating Item 15 disclosures.
To learn more about franchisee participation obligations and how we can help you prepare or improve your Item 15 disclosures, call us at (800) 976-4904 or fill out our contact form.