Within Item 9, the franchisor must disclose, in table format, the franchisee’s obligations under the franchise agreement. This table includes a summary of all legal obligations ranging from site selection and opening to default provisions and the franchisee’s obligations upon termination of the franchise agreement.
As a proven business model that can offer aspiring entrepreneurs a tried-and-true recipe for success, it’s no wonder so many franchisees choose to buy a franchise over starting an independent business.
Still, becoming a successful franchisee requires hard work and a commitment to operating the business in a specific manner. All franchisors have at least some requirements that their franchisees must adhere to, including systems and procedures that must be followed during daily operations to maintain brand integrity across the franchise system.
Under the Federal Trade Commission’s Franchise Rule, Item 9 of the Franchise Disclosure Document (FDD) is used to disclose the obligations of franchisees prior to the sale of a franchise. The information included in Item 9 is intended to help prospective franchisees understand the responsibilities of owning a franchised business before making a purchase while determining whether those obligations are a good fit for their lifestyle and goals.
Below, we’ll explore the information that franchisors must disclose in Item 9 of the FDD to help franchisees understand their obligations as business owners before investing in a franchise.
What Information Must Be Disclosed in Item 9?
Per the requirements outlined in 16 C.F.R. §436.5(i), franchisors must disclose the principal obligations of the franchisee in tabular format within Item 9 of the FDD. The information included in the table must address a list of 24 specific obligations, in addition to any other principal obligations that are required of the franchisee while operating the franchised business.
Item 9 Disclosures and Format
The disclosures in Item 9 of the FDD must be presented in a tabular format as prescribed by 16 C.F.R. §436.5(i). Above the table, the title “FRANCHISEE'S OBLIGATIONS” must appear in bold, capitalized letters.
Per the requirements of the federal Franchise Rule, the first column of the table in Item 9 should be titled “Obligation.” In the rows of that column, franchisors must disclose 24 specific franchisee obligations common to franchises, as well as any additional obligations, with each obligation listed in a designated row and assigned a letter of the alphabet beginning with “a” and continuing to “y.”
The mandatory obligations that must be disclosed in the “Obligation” column include, but are not limited to, pre-opening purchases and leases, initial and ongoing training fees, other fees, compliance standards, trademarks, territorial development and sales quotas, advertising, indemnification and more.
For each obligation disclosed in the table, the franchisor must provide a cross-reference to the section of the franchise agreement and/or disclosure document item where the obligation is listed. These cross-references should be noted appropriately in the second and third columns of the table, respectively titled “Section in agreement” and “Disclosure document item.”
Other Franchisee Obligations
Franchisors need to make sure all franchisee obligations are disclosed in Item 9. Any additional obligations beyond those mandated by the federal Franchise Rule should be listed in the “Other” row of the table.
Providing Complete Information
Although the federal Franchise Rule does not require franchisors to provide extensive information about the disclosures in Item 9, prospective franchisees should be left with as few questions as possible about their obligations when reviewing the disclosure item. For obligations that require additional information or explanation, franchisors are permitted to include footnotes at the end of the table.
In situations where a specific mandatory obligation doesn’t apply to the franchisee, franchisors should not leave that row of the table blank. Instead, they should state “Not Applicable” within the appropriate boxes.
In addition to helping prospective franchisees understand their legal obligations as the owner of a franchised business, Item 9 can provide valuable insight into whether or not a particular franchise offering is the right fit for both parties.
Because Item 9 outlines the specific responsibilities that franchisees are legally required to adhere to after joining the franchise system, franchisee candidates should pay close attention to its disclosures when reviewing the FDD. If a franchisee candidate is uncomfortable with any of the obligations disclosed in Item 9, it might be a good idea to consider other franchise opportunities that could be a better fit.