What is Item 22 in the Franchise Disclosure Document
Within Item 22, the franchisor must list and attach as an exhibit all contracts that a franchisee must sign with the franchisor. These contracts include a sample of the franchisor's standard franchise agreement and related agreements such as a development agreement, site selection agreement, release agreement and others.
During the franchise sales process, transparency is critical – especially when it comes to legal agreements.
The purpose of Item 22 of the Franchise Disclosure Document (FDD) is to help prospective franchisees understand the contracts they will be expected to sign when purchasing a franchised business. By allowing franchisee candidates to review the proposed legal agreements related to the franchise opportunity being offered before investing in it, franchisors provide an opportunity for prospective franchisees to make better business decisions.
In this article, we’ll explore the legal agreements that must be disclosed in Item 22 to make sure franchisee candidates understand their legal commitments before buying a franchise.
What Information Must Be Disclosed in Item 22?
The federal Franchise Rule requires franchisors to attach a copy of all proposed agreements related to the franchise offering in Item 22 of the FDD.
Item 22 Disclosures and Format
The disclosure requirements set forth in 16 CFR § 436.5(v) pertaining to Item 22 must include, but are not limited to, all contracts provided to the franchisee by the franchisor regarding the franchise offering. This often includes the franchise agreement, development agreement, site selection agreement, release agreement and more. Additionally, the franchisor must disclose any other agreements the franchisor intends to propose related to the franchise offering, such as sublet agreements, guarantees, loan documents, etc.
Although the federal Franchise Rule does not require a specifically prescribed format for Item 22, it is standard for the franchisor to begin the section with a brief opening statement noting the item’s required disclosures. This statement, which is typically one sentence, is followed by an itemized list of the specific exhibits attached to the FDD under Item 22.
Although the disclosures in Item 22 are straightforward, it is important to make sure that all of the required contracts are disclosed and can be cross-referenced in the appropriate sections, particularly Item 23. By working with an experienced franchise attorney, franchisors can ensure their Item 22 disclosures are complete.