Transcription
FRANCHISE RULE16 C.F.R. Part 436COMPLIANCE GUIDEMay 2008
INTRODUCTIONThis Compliance Guide is intended to help franchisors comply with the Federal TradeCommission’s amended Franchise Rule. The original Franchise Rule went into effect onOctober 21, 1979. The Federal Trade Commission (“FTC” or “the Commission”) approvedamendments to the Franchise Rule on January 22, 2007.Since July 1, 2007, franchisors could comply with the FTC’s disclosure requirements byusing any one of the following formats: (1) the original Franchise Rule; (2) the UniformFranchise Offering Circular (“UFOC”); or (3) the amended Franchise Rule. Once a franchisorselects a disclosure format, it must use that format and no other. As of July 1, 2008, however, allfranchisors must use only the amended Franchise Rule.This Guide does not modify the amended Rule. It explains the requirements of theamended Rule. Moreover, it does not exhaustively cover every requirement contained in theamended Rule, but focuses on amended Rule provisions that depart from the familiar UFOCGuidelines. This Guide also includes sample disclosures that illustrate the new provisions andwill be useful in preparing compliant disclosures.There is no substitute for the text of the amended Rule. It is the authoritative statementof what franchisors need to do to comply. Thus, the amended Rule’s text – along with itsexplanatory Statement of Basis and Purpose – is the starting point and ultimate authority inpreparing compliant disclosures. This Guide is an additional resource, representing the FTCstaff’s view of what the law requires. This Guide will be updated periodically as newinterpretive issues arise.Other important resources for compliance guidance are the “Amended Franchise RuleFAQ’s” on the FTC’s web site at .shtm, andstaff opinions that have been issued in response to specific requests regarding particular factsituations. The staff opinions can be found at http://www.ftc.gov/bcp/franchise/netadopin.shtm.
The advice in this Guide is not binding on the Commission. In addition, the originalRule’s Statement of Basis and Purpose and previous informal staff advisory opinions remainvalid sources of interpretation, except to the extent of any conflict with the amended Rule’srequirements.Like the original Franchise Rule and the UFOC Guidelines, the amended Rule requiresfranchisors to give prospective franchisees material information, including backgroundinformation on the franchisor, the costs of entering into the business, the legal obligations of thefranchisor and the franchisee, statistics on franchised and company-owned outlets, and auditedfinancial information. In addition, if franchisors elect to make any financial performancerepresentations, the amended Franchise Rule requires certain disclosures and substantiation forthose representations. For the most part, these disclosures are based upon the UFOC Guidelines,with which many franchisors and practitioners are already familiar.As outlined below, the amended Rule differs from the UFOC Guidelines (and the originalRule) in several respects. First, the amended Rule updates the UFOC Guidelines to address newtechnologies, like the Internet. Second, the amended Rule requires more disclosure about thenature of franchisor-franchisee relationships. The amended Rule includes several disclosurerequirements not included in the UFOC Guidelines. Also, the Amended Rule exempts certainentities that the original Rule did not exempt, and prohibits certain practices not addressed in theoriginal Rule.-ii-
TABLE OF CONTENTSFranchise Rule Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1What Types of Relationships Are Covered. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1The “Trademark” Element. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2The “Significant Control or Assistance” Element. . . . . . . . . . . . . . . . . . . . . . . . . . 2When Is Control or Assistance Significant. . . . . . . . . . . . . . . . . . . . . . . . . 2What Activities Do Not Constitute Significant Control or Assistance. . . . 4The “Required Payment” Element. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4What Types of Payments Constitute “Required Payments”. . . . . . . . . . . . 5What Types of Payments Do Not Constitute “Required Payments”. . . . . . 6What Types of Relationships Are Not Covered. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Business Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Sales of Franchises to Be LocatedOutside of the United States and its Territories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7What Types of Relationships Are Exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Minimum Payment Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Fractional Franchise Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Whose Experience May Be Considered. . . . . . . . . . . . . . . . . . . . . . . . . . . 8What Does “Same Line of Business” Mean. . . . . . . . . . . . . . . . . . . . . . . . 8How Is Sales Volume Calculated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Leased Department Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Oral Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Petroleum Marketers and Resellers Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Large Franchise Investment Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10What Is an “Initial Investment”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Do Conversion Franchises and Transfers Qualify for the Exemption. . . . 11Who Must Make the Initial Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . 12What Is the “Acknowledgment” Requirement. . . . . . . . . . . . . . . . . . . . . 12Large Franchisee Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12What Type of Business Experience Is Required. . . . . . . . . . . . . . . . . . . . 13How Is Net Worth Determined. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13May the Experience and Net Worth ofParent and Affiliate Companies Be Considered. . . . . . . . . . . . . . . . . . . . 13The “Insiders” Exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Exclusions from the Amended Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Employer-employee Relationship Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15General Partner Relationship Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Cooperative Associations Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Certification or Testing Services Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Single Trademark License Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-iii-
Compliance with Disclosure Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Who Is Responsible for Preparing Disclosure Documents. . . . . . . . . . . . . . . . . . . . . . . . 17Who Is Responsible for Furnishing Disclosure Documents. . . . . . . . . . . . . . . . . . . . . . . 18What Happens When an Existing Franchisee Sells His or Her Outlet. . . . . . . . . 18What Happens When an Existing Franchisee Purchases Additional Outlets. . . . 19Ways of Furnishing Disclosure Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Are There Any Specific Requirements for Electronic Disclosures. . . . . . . . . . . . 19Is Electronic Disclosure Permitted for All Franchisors as of July 1, 2007. . . . . . 20At What Point in the Sales Process Must aFranchisor Furnish the Disclosure Document. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Payment to or Binding Agreement with the Franchisor or Affiliate. . . . . . . . . . . 21Actions That Constitute the Furnishing of Disclosure Documents. . . . . . . . . . . . 21Opportunity for Prospective Franchisees to Review the Franchise Agreement. . . . . . . . 22Unilateral Material Modifications by the Franchisor. . . . . . . . . . . . . . . . . . . . . . 22Unilateral Material Modifications by the Franchisee. . . . . . . . . . . . . . . . . . . . . . 23The Disclosure Document. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24The Cover Page. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Reference to Item 5 and Item 7 Fees and Investment. . . . . . . . . . . . . . . . . . . . . . 25Available Disclosure Formats. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Issuance Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Inclusion of State Information on the Cover Page. . . . . . . . . . . . . . . . . . . . . . . . . 26Sample Cover Page. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27The Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Sample Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Item 1: The Franchisor and Any Parents, Predecessors, and Affiliates. . . . . . . . . . . . . . 29Franchisor Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Agent for Service of Process Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Parent Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Predecessor Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Principal Business Address Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Applicable Government Regulations Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 31Sample Item 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Item 2: Business Experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Sample Item 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Item 3: Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34What Types of Litigation Must Be Disclosed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Pending Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Material Actions Involving the Franchise Relationship. . . . . . . . . . . . . . 36Prior Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Injunctive Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Whose Litigation Must Be Disclosed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Chart of Whose Actions Must Be Disclosed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Sample Item 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41-iv-
Item 4: Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Sample Item 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Item 5: Initial Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Uniformity of Fees Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Refunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Installment Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Sample Item 5-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Sample Item 5-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Item 6: Other Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Sample Item 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Item 7: Estimated Initial Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Sample Item 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Item 8: Restrictions on Sources of Products and Services. . . . . . . . . . . . . . . . . . . . . . . . 51Required Purchases of Goods and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Optional Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Approval of Alternative Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Ownership Interest in a Supplier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Revenue Derived from a “Supplier”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Payments to Third Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Extent of Required Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Aggregate Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Cooperatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Negotiated Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Sample Item 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Item 9: Franchisee’s Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Sample Item 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Item 10: Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Financing Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Variable Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Sample Item 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training. . . . . 63Required Statement about the Limited Extent of theFranchisor’s Obligation to Furnish Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . 64Pre-Opening Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Continuing Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Optional Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Advertising Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Multiple Brand Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Allocation of Production and Administrative Expenses. . . . . . . . . . . . . . . . . . . . 66Computer Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Operating Manuals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Training. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68-v-
Sample Item 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Item 12: Territory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Sample Item 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Item 13: Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Sample Item 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Item 14: Patents, Copyrights, and Proprietary Information. . . . . . . . . . . . . . . . . . . . . . . 76Sample Item 14-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Sample Item 14-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Item 15: Obligation to Participate in the Actual Operation of the Franchise Business. . 78Sample Item 15-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Sample Item 15-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Item 16: Restrictions on What the Franchisee May Sell. . . . . . . . . . . . . . . . . . . . . . . . . 79Sample Item 16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Item 17: Renewal, Termination, Transfer, and Dispute Resolution. . . . . . . . . . . . . . . . . 80Discretionary Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Renewals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Sample Item 17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Item 18: Public Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Who Qualifies as a “Public Figure”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Use of Name, Image, or Endorsement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Sample Item 18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Item 19: Financial Performance Representations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Required Item 19 Preambles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Financial Performance Representations: Historical or Projected. . . . . . . . . . . . . 86Historic Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87The Group Measured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Did All Outlets in the System, or Only Some ofThem, Achieve the Stated Level of Performance. . . . . . . . . . . . . 87Are the Outlets Measured Franchised Outlets, Company-ownedor Outlets of an Affiliated System with Similar Operations. . . . . 87Time Period Measured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88When Was the Stated Level of Performance Achieved. . . . . . . . . 88Number of Outlets Measured. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89How Many Outlets Are in the Group ThatAchieved the Stated Level of Performance, andHow Many Are in the Entire System. . . . . . . . . . . . . . . . . 89Number of Outlets Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89How Many Outlets in the Relevant Group Supplied thePerformance Data Underlying the Representation. . . . . . . . . . . . 89-vi-
Number and Percentage of Outlets thatAchieved the Stated Level of Performance. . . . . . . . . . . . . . . . . . . . . . . . 90What Proportion of the Group MeasuredAchieved the Results Claimed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 90Distinguishing Characteristics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90What Are the Common Attributes of the OutletsThat Achieved the Stated Level of Performance. . . . . . . . . . . . . . 90Projected Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91Admonition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Availability of Substantiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Financial Performance Representationson a Specific Outlet Offered for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Supplemental Representations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Sample Item 19-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Sample Item 19-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Item 20: Outlets and Franchisee Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Statistical Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Definitions Used in Item 20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96General Instructions for Preparing Item 20 Tables. . . . . . . . . . . . . . . . . . . . . . . . 97 Multiple Events Affecting the Status of a Particular Franchise Outlet. . . . . . . . . 97Table No. 1 – Systemwide Outlet Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97Sample Item 20-1 (Table 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Table No. 2 – Summary of Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Sample Item 20-2 (Table 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Table No. 3 – Summary of Status of Franchisee-Owned Outlets. . . . . . . . . . . . . 99Multiple Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Sample Item 20-3 (Table 3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Table No. 4 – Summary of Status of Company-Owned Outlets. . . . . . . . . . . . . 100Sample Item 20-3 (Table 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Table No. 5 – Projected New Outlets (Both Franchised and Company-Owned).101Outlets Signed but Not Opened. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Projected Franchised and Company-Owned Outlets. . . . . . . . . . . . . . . . 102Sample Item 20-5 (Table 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Contact Information for Current Franchisees. . . . . . . . . . . . . . . . . . . . . . . . . . . 102Contact Information for Former Franchisees. . . . . . . . . . . . . . . . . . . . . . . . . . . 103Sample Item 20-6 (Former Franchisees). . . . . . . . . . . . . . . . . . . . . . . . . 104Previous Owner Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Sample Item 20 -7 (Previous Owners). . . . . . . . . . . . . . . . . . . . . . . . . . 106Confidentiality Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107What Constitutes a “Confidentiality Agreement”. . . . . . . . . . . . . . . . . . 107-vii-
What about Clauses Designed to ProtectTrademarks or Other Proprietary Information. . . . . . . . . . . . . . . . . . . . . 108Optional Additional Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108Sample Item 20-8 (Confidentiality Agreements). . . . . . . . . . . . . . . . . . . 109Franchisee Associations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109Associations Created, Sponsored, or Endorsed by the Franchisor. . . . . 110Independent Franchisee Associations. . . . . . . . . . . . . . . . . . . . . . . . . . . 110“Organized under State Law”. . . . . . . . . . . . . . . . . . . . . . . . . . . 111Request for Inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Annual Renewal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Sample Item 20-9 (Franchisee Associations). . . . . . . . . . . . . . . . . . . . . 112Item 21: Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112GAAP Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113Parent Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Affiliate Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Subfranchisor Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114Phase-In of Audited Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Sample Item 21-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Sample Item 21-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Item 22: Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Sample Item 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Item 23: Receipts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Required Preamble. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117Name of Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Issuance Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Return of Receipt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Sample Item 23. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Instructions for Preparing Disclosure Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Use of “Plain English”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Single Document. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Disclosures Must Address Each Disclosure Item. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121No Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122State Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Electronic Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Multi-State Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Subfranchisors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Statement of Prerequisites To Reviewing A Disclosure Document. . . . . . . . . . . . . . . . 124Sample Advisory on Disclosure DocumentFormat, Prerequisites, and Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Recordkeeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125-viii-
Instructions for Updating Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Annual Updating Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Quarterly Updating Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Relationship Between Annual and Quarterly Updates. . . . . . . . . . . . . . . . . . . . . . . . . . 127Prospective Franchisee’s Right to ObtainUpdated Disclosures and Any Quarterly Updates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128When is a Request “Reasonable”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128How Long After Updates Before Signing the Franchise Agreement. . . . . . . . . 128Material Changes Relating to Financial Performance Representations. . .
Franchise Offering Circular (“UFOC”); or (3) the amended Franchise Rule. Once a franchisor selects a disclosure format, it must use that format and no other. As of July 1, 2008, however, all franchisors must use only the amended Franchise Rule. This Guide does not mod
