Franchisors must disclose the last five years of specific individuals’ business experience within Item 2 of the Franchise Disclosure Document.
As a new franchisor, understanding the contents of the Franchise Disclosure Document can often seem intimidating – especially when you’re just getting started.
Because of its status as a federally-regulated legal document, it’s critical that your FDD is properly prepared and consistent with federal guidelines. But as a key component of the sale of every franchise, it’s also important that franchisors are familiar with the document’s contents to improve their sales processes in the future.
In this article, we’ll explore Item 2 of the FDD to help you understand its contents and the information it provides to franchisee candidates.
Business Experience Disclosures
Under the Federal Trade Commission’s amended Franchise Rule, which defines the FDD’s mandatory disclosures, Item 2 requires the disclosure of the business experience of specific individuals involved in the franchise entity. These include individuals who are managing the franchise including directors, trustees, general partners, principal officers, and any individuals who will have management responsibility relating to either the sale or operation of the franchise.
Here is what you need to include in Item 2 of the FDD:
- Full name
- Title with the franchise company
- Past 5 year employment history, including each position's start and end date, business name, location, and address.
It is not necessary to go beyond five years and you should not include a narrative description of any general, educational, promotional, or accomplishment information. Any extra information that goes beyond these requirements will most likely be asked to be removed by State Examiners.
Whose Experience Must be Disclosed
The Franchise Rule requires the disclosure of the business experience of a franchisor’s directors, principal officers, and any individuals that have management responsibilities relating to the sale or operation of the franchise(s) offered by the FDD, regardless of the entity that formally employs those individuals (i.e., the franchisor, an affiliate, or a parent company) – even if those individuals don’t have a formal title.
Whose Experience Isn’t Required
Although the business experience of individuals with management responsibilities related to the sale or operation of the franchise being offered must be disclosed, franchisors aren’t required to disclose the business experience of any franchise brokers involved in the sale of its franchises.
Additionally, franchisors aren’t required to disclose the business experience of all managers involved in the franchise. Per the Franchise Rule Compliance Guide, an individual's past business experience “should be disclosed if their involvement in either sales or operations is such that a prospective franchisee would rely on their expertise, formulation of policy, or control of the system in making an investment decision.”
Because every franchisor is different, you should always seek the advice of an experienced franchise attorney to determine the appropriate disclosures to include in your FDD.