Virginia Administrative Code
Title 21 - SECURITIES AND RETAIL FRANCHISING
Agency 5 - STATE CORPORATION COMMISSION
Chapter 110 - RETAIL FRANCHISING ACT RULES
Section 21VAC5-110-95 - Requirements for Franchise Disclosure Document preparation
Universal Citation: 1 VA Admin Code 5-110-95
Current through Register Vol. 41, No. 3, September 23, 2024
A. Applications for registration of a franchise, or applications for renewal or amendment of an existing franchise registration, must comply with the following requirements for preparing the contents of a Franchise Disclosure Document. Except for financial statement requirements for start-up franchise systems, as further discussed in Item 21, these requirements are substantively equivalent to the requirements adopted under the Federal Trade Commission Franchise Rule, 16 CFR 436.3 through 16 CFR 436.5, effective July 1, 2007.
Contents of the Franchise Disclosure Document
The Cover Page
Begin the disclosure document with a cover page, in the order and form as follows:
1. The title
"FRANCHISE DISCLOSURE DOCUMENT" in capital letters and bold
type.
2. The franchisor's name,
type of business organization, principal business address, telephone number,
and, if applicable, email address and primary home page address.
3. A sample of the primary business trademark
that the franchisee will use in its business.
4. A brief description of the franchised
business.
5. The following
statements:
a. The total investment necessary
to begin operation of a [franchise system name] franchise is [the total amount
of Item 7]. This includes [the total amount in Item 5] that must be paid to the
franchisor or affiliate.
b. This
disclosure document summarizes certain provisions of your franchise agreement
and other information in plain English. Read this disclosure document and all
accompanying agreements carefully. You must receive this disclosure document at
least 14 calendar days before you sign a binding agreement with, or make any
payment to, the franchisor or an affiliate in connection with the proposed
franchise sale. [The following sentence in bold type] Note, however, that no
governmental agency has verified the information contained in this
document.
c. The terms of your
contract will govern your franchise relationship. Don't rely on the disclosure
document alone to understand your contract. Read all of your contract
carefully. Show your contract and this disclosure document to an advisor, such
as a lawyer or an accountant.
d.
Buying a franchise is a complex investment. The information in this disclosure
document can help you make up your mind. More information on franchising, such
as "A Consumer's Guide to Buying a Franchise," which can help you understand
how to use this disclosure document, is available from the Federal Trade
Commission. You can contact the FTC at 1-877-FTC-HELP or by writing to the FTC
at 600 Pennsylvania Avenue, NW, Washington, D.C. 20580. You can also visit the
FTC's home page at www.ftc.gov for additional
information. Call your state agency or visit your public library for other
sources of information on franchising.
e. There may also be laws on franchising in
your state. Ask your state agencies about them.
f. [The issuance date].
6. A franchisor may include the following
statement between the statements set out at subdivisions b and c of the cover
page: "You may wish to receive your disclosure document in another format that
is more convenient for you. To discuss the availability of disclosures in
different formats, contact [name or office] at [address] and [telephone
number]."
7. Franchisors may
include additional disclosures on the cover page, on a separate cover page, or
addendum to comply with state presale disclosure laws.
The Table of Contents
Include the following table of contents. State the page where each disclosure item begins. List all exhibits by letter, as shown in the following example.
Table of Contents
1. The Franchisor and any Parents,
Predecessors, and Affiliates
2.
Business Experience
3.
Litigation
4. Bankruptcy
5. Initial Fees
6. Other Fees
7. Estimated Initial Investment
8. Restrictions on Sources of Products and
Services
9. Franchisee's
Obligations
10. Financing
11. Franchisor's Assistance, Advertising,
Computer Systems, and Training
12.
Territory
13. Trademarks
14. Patents, Copyrights, and Proprietary
Information
15. Obligation to
Participate in the Actual Operation of the Franchise Business
16. Restrictions on What the Franchisee May
Sell
17. Renewal, Termination,
Transfer, and Dispute Resolution
18. Public Figures
19. Financial Performance
Representations
20. Outlets and
Franchisee Information
21.
Financial Statements
22.
Contracts
23. Receipts
Exhibits
A. Franchise Agreement
B. Additional exhibits as
applicable
B. The additional requirements for preparation of the Franchise Disclosure Document are contained below:
1. Item 1: The Franchisor, and any Parents,
Predecessors, and Affiliates.
Disclose:
a. The
name and principal business address of the franchisor; any parents; and any
affiliates that offer franchises in any line of business or provide products or
services to the franchisees of the franchisor.
b. The name and principal business address of
any predecessors during the 10-year period immediately before the close of the
franchisor's most recent fiscal year.
c. The name that the franchisor uses and any
names it intends to use to conduct business.
d. The identity and principal business
address of the franchisor's agent for service of process.
e. The type of business organization used by
the franchisor (for example, corporation, partnership) and the state in which
it was organized.
f. The following
information about the franchisor's business and the franchises offered:
(1) Whether the franchisor operates
businesses of the type being franchised.
(2) The franchisor's other business
activities.
(3) The business the
franchisee will conduct.
(4) The
general market for the product or service the franchisee will offer. In
describing the general market, consider factors such as whether the market is
developed or developing, whether the goods will be sold primarily to a certain
group, and whether sales are seasonal.
(5) In general terms, any laws or regulations
specific to the industry in which the franchise business operates.
(6) A general description of the
competition.
g. The
prior business experience of the franchisor; any predecessors listed in Item 1
b; and any affiliates that offer franchises in any line of business or provide
products or services to the franchisees of the franchisor, including:
(1) The length of time each has conducted the
type of business the franchisee will operate.
(2) The length of time each has offered
franchises providing the type of business the franchisee will
operate.
(3) Whether each has
offered franchises in other lines of business. If so, include:
(a) A description of each other line of
business.
(b) The number of
franchises sold in each other line of business.
(c) The length of time each has offered
franchises in each other line of business.
2. Item 2: Business Experience.
Disclose by name and position the franchisor's directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered by this document. For each person listed in this section, state his principal positions and employers during the past five years, including each position's starting date, ending date, and location.
3. Item 3: Litigation.
a. Disclose whether the franchisor; a
predecessor; a parent or affiliate who induces franchise sales by promising to
back the franchisor financially or otherwise guarantees the franchisor's
performance; an affiliate who offers franchises under the franchisor's
principal trademark; and any person identified in Item 2:
(1) Has pending against that person:
(a) An administrative, criminal, or material
civil action alleging a violation of a franchise, antitrust, or securities law,
or alleging fraud, unfair or deceptive practices, or comparable
allegations.
(b) Civil actions,
other than ordinary routine litigation incidental to the business, which are
material in the context of the number of franchisees and the size, nature, or
financial condition of the franchise system or its business
operations.
(2) Was a
party to any material civil action involving the franchise relationship in the
last fiscal year. For purposes of this item, "franchise relationship" means
contractual obligations between the franchisor and franchisee directly relating
to the operation of the franchised business (such as royalty payment and
training obligations). It does not include actions involving suppliers or other
third parties, or indemnification for tort liability.
(3) Has in the 10-year period immediately
before the disclosure document's issuance date:
(a) Been convicted of or pleaded nolo
contendere to a felony charge.
(b)
Been held liable in a civil action involving an alleged violation of a
franchise, antitrust, or securities law, or involving allegations of fraud,
unfair or deceptive practices, or comparable allegations. "Held liable" means
that, as a result of claims or counterclaims, the person must pay money or
other consideration, must reduce an indebtedness by the amount of an award,
cannot enforce its rights, or must take action adverse to its
interests.
b.
Disclose whether the franchisor; a predecessor; a parent or affiliate who
guarantees the franchisor's performance; an affiliate who has offered or sold
franchises in any line of business within the last 10 years; or any other
person identified in Item 2 is subject to a currently effective injunctive or
restrictive order or decree resulting from a pending or concluded action
brought by a public agency and relating to the franchise or to a federal,
state, or Canadian franchise, securities, antitrust, trade regulation, or trade
practice law.
c. For each action
identified in subdivision a and b of Item 3, state the title, case number or
citation, the initial filing date, the names of the parties, the forum, and the
relationship of the opposing party to the franchisor (for example, competitor,
supplier, lessor, franchisee, former franchisee, or class of franchisees).
Except as provided in subdivision d of Item 3, summarize the legal and factual
nature of each claim in the action, the relief sought or obtained, and any
conclusions of law or fact.1 In addition, state:
(1) For pending actions, the status of the
action.
(2) For prior actions, the
date when the judgment was entered and any damages or settlement
terms.2
(3) For injunctive or restrictive orders, the
nature, terms, and conditions of the order or decree.
(4) For convictions or pleas, the crime or
violation, the date of conviction, and the sentence or penalty
imposed.
d. For any
other franchisor-initiated suit identified in subdivision a (2) of Item 3, the
franchisor may comply with the requirements of subdivision c (1) through (4) of
Item 3 by listing individual suits under one common heading that will serve as
the case summary (for example, "royalty collection suits").
4. Item 4: Bankruptcy.
a. Disclose whether the franchisor; any
parent; predecessor; affiliate; officer, or general partner of the franchisor,
or any other individual who will have management responsibility relating to the
sale or operation of franchises offered by this document, has, during the
10-year period immediately before the date of this disclosure document:
(1) Filed as debtor (or had filed against it)
a petition under the United States Bankruptcy Code (Bankruptcy Code).
(2) Obtained a discharge of its debts under
the Bankruptcy Code.
(3) Been a
principal officer of a company or a general partner in a partnership that
either filed as a debtor (or had filed against it) a petition under the
Bankruptcy Code, or that obtained a discharge of its debts under the Bankruptcy
Code while, or within one year after, the officer or general partner held the
position in the company.
b. For each bankruptcy, state:
(1) The current name, address, and principal
place of business of the debtor.
(2) Whether the debtor is the franchisor. If
not, state the relationship of the debtor to the franchisor (for example,
affiliate, officer).
(3) The date
of the original filing and the material facts, including the bankruptcy court,
and the case name and number. If applicable, state the debtor's discharge date,
including discharges under Chapter 7 and confirmation of any plans of
reorganization under Chapters 11 and 13 of the Bankruptcy Code.
c. Disclose cases, actions, and
other proceedings under the laws of foreign nations relating to
bankruptcy.
5. Item 5:
Initial Fees.
Disclose the initial fees and any conditions under which these fees are refundable. If the initial fees are not uniform, disclose the range or formula used to calculate the initial fees paid in the fiscal year before the issuance date and the factors that determined the amount. For this item, "initial fees" means all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee's business opens, whether payable in lump sum or installments. Disclose installment payment terms in this section or in Item 10.
6. Item 6: Other Fees.
Disclose, in the following tabular form, all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party. State the title "OTHER FEES" in capital letters using bold type. Include any formula used to compute the fees.3
| Item 6 Table OTHER FEES | ||||
| Column 1 | Column 2 | Column 3 | Column 4 | |
| Type of fee | Amount | Due Date | Remarks | |
a. In column 1,
list the type of fee (for example, royalties, and fees for lease negotiations,
construction, remodeling, additional training or assistance, advertising,
advertising cooperatives, purchasing cooperatives, audits, accounting,
inventory, transfers, and renewals).
b. In column 2, state the amount of the
fee.
c. In column 3, state the due
date for each fee.
d. In column 4,
include remarks, definitions, or caveats that elaborate on the information in
the table. If remarks are long, franchisors may use footnotes instead of the
remarks column. If applicable, include the following information in the remarks
column or in a footnote:
(1) Whether the fees
are payable only to the franchisor.
(2) Whether the fees are imposed and
collected by the franchisor.
(3)
Whether the fees are nonrefundable or describe the circumstances when the fees
are refundable.
(4) Whether the
fees are uniformly imposed.
(5) The
voting power of franchisor-owned outlets on any fees imposed by cooperatives.
If franchisor-owned outlets have controlling voting power, disclose the maximum
and minimum fees that may be imposed.
7. Item 7: Estimated Initial Investment.
Disclose, in the following tabular form, the franchisee's estimated initial investment. State the title "YOUR ESTIMATED INITIAL INVESTMENT" in capital letters using bold type. Franchisors may include additional expenditure tables to show expenditure variations caused by differences such as in site location and premises size.
| Item 7 Table YOUR ESTIMATED INITIAL INVESTMENT | |||||
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | |
| Type of expenditure | Amount | Method of payment | When due | To whom payment is to be made | |
| Total | |||||
a. In column 1:
(1) List each type of expense, beginning with
pre-opening expenses. Include the following expenses, if applicable. Use
footnotes to include remarks, definitions, or caveats that elaborate on the
information in the table.
(a) The initial
franchise fee.
(b) Training
expenses.
(c) Real property,
whether purchased or leased.
(d)
Equipment, fixtures, other fixed assets, construction, remodeling, leasehold
improvements, and decorating costs, whether purchased or leased.
(e) Inventory to begin operating.
(f) Security deposits, utility deposits,
business licenses, and other prepaid expenses.
(2) List separately and by name any other
specific required payments (for example, additional training, travel, or
advertising expenses) that the franchisee must make to begin
operations.
(3) Include a category
titled "Additional funds - [initial period]" for any other required expenses
the franchisee will incur before operations begin and during the initial period
of operations. State the initial period. A reasonable initial period is at
least three months or a reasonable period for the industry. Describe in general
terms the factors, basis, and experience that the franchisor considered or
relied upon in formulating the amount required for additional funds.
b. In column 2, state the amount
of the payment. If the amount is unknown, use a low-high range based on the
franchisor's current experience. If real property costs cannot be estimated in
a low-high range, describe the approximate size of the property and building
and the probable location of the building (for example, strip shopping center,
mall, downtown, rural, or highway).
c. In column 3, state the method of
payment.
d. In column 4, state the
due date.
e. In column 5, state to
whom payment will be made.
f. Total
the initial investment, incorporating ranges of fees, if used.
g. In a footnote, state:
(1) Whether each payment is nonrefundable, or
describe the circumstances when each payment is refundable.
(2) If the franchisor or an affiliate
finances part of the initial investment, the amount that it will finance, the
required down payment, the annual interest rate, rate factors, and the
estimated loan repayments. Franchisors may refer to Item 10 for additional
details.
8.
Item 8: Restrictions on Sources of Products and Services.
Disclose the franchisee's obligations to purchase or lease goods, services, supplies, fixtures, equipment, inventory, computer hardware and software, real estate, or comparable items related to establishing or operating the franchised business either from the franchisor, its designee, or suppliers approved by the franchisor, or under the franchisor's specifications. Include obligations to purchase imposed by the franchisor's written agreement or by the franchisor's practice.4 For each applicable obligation, state:
a. The
good or service required to be purchased or leased.
b. Whether the franchisor or its affiliates
are approved suppliers or the only approved suppliers of that good or
service.
c. Any supplier in which
an officer of the franchisor owns an interest.
d. How the franchisor grants and revokes
approval of alternative suppliers, including:
(1) Whether the franchisor's criteria for
approving suppliers are available to franchisees.
(2) Whether the franchisor permits
franchisees to contract with alternative suppliers who meet the franchisor's
criteria.
(3) Any fees and
procedures to secure approval to purchase from alternative suppliers.
(4) The time period in which the franchisee
will be notified of approval or disapproval.
(5) How approvals are revoked.
e. Whether the franchisor issues
specifications and standards to franchisees, subfranchisees, or approved
suppliers. If so, describe how the franchisor issues and modifies
specifications.
f. Whether the
franchisor or its affiliates will or may derive revenue or other material
consideration from required purchases or leases by franchisees. If so, describe
the precise basis by which the franchisor or its affiliates will or may derive
that consideration by stating:
(1) The
franchisor's total revenue.5
(2) The franchisor's revenues from all
required purchases and leases of products and services.
(3) The percentage of the franchisor's total
revenues that are from required purchases or leases.
(4) If the franchisor's affiliates also sell
or lease products or services to franchisees, the affiliates' revenues from
those sales or leases.
g. The estimated proportion of these required
purchases and leases by the franchisee to all purchases and leases by the
franchisee of goods and services in establishing and operating the franchised
businesses.
h. If a designated
supplier will make payments to the franchisor from franchisee purchases,
disclose the basis for the payment (for example, specify a percentage or a flat
amount). For purposes of this disclosure, a "payment" includes the sale of
similar goods or services to the franchisor at a lower price than to
franchisees.
i. The existence of
purchasing or distribution cooperatives.
j. Whether the franchisor negotiates purchase
arrangements with suppliers, including price terms, for the benefit of
franchisees.
k. Whether the
franchisor provides material benefits (for example, renewal or granting
additional franchises) to a franchisee based on a franchisee's purchase of
particular products or services or use of particular suppliers.
9. Item 9: Franchisee's
Obligations.
Disclose, in the following tabular form, a list of the franchisee's principal obligations. State the title "FRANCHISEE'S OBLIGATIONS" in capital letters using bold type. Cross-reference each listed obligation with any applicable section of the franchise or other agreement and with the relevant disclosure document provision. If a particular obligation is not applicable, state "Not Applicable." Include additional obligations, as warranted.
| Item 9 Table FRANCHISEE'S OBLIGATIONS | |||
| [In bold] This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this disclosure document. | |||
| Obligation | Section in agreement | Disclosure document item | |
| a. Site selection and acquisition/lease | |||
| b. Pre-opening purchase/leases | |||
| c. Site development and other pre-opening requirements | |||
| d. Initial and ongoing training | |||
| e. Opening | |||
| f. Fees | |||
| g. Compliance with standards and policies/operating manual | |||
| h. Trademarks and proprietary information | |||
| i. Restrictions on products/services offered | |||
| j. Warranty and customer service requirements | |||
| k. Territorial development and sales quotas | |||
| l. Ongoing product/service purchases | |||
| m. Maintenance, appearance, and remodeling requirements | |||
| n. Insurance | |||
| o. Advertising | |||
| p. Indemnification | |||
| q. Owner's participation/management/staffing | |||
| r. Records and reports | |||
| s. Inspections and audits | |||
| t. Transfer | |||
| u. Renewal | |||
| v. Posttermination obligations | |||
| w. Noncompetition covenants | |||
| x. Dispute resolution | |||
| y. Other (describe) | |||
10.
Item 10: Financing.
a. Disclose the terms of
each financing arrangement, including leases and installment contracts, that
the franchisor, its agent, or affiliates offer directly or indirectly to the
franchisee.6 The franchisor may summarize the terms
of each financing arrangement in tabular form, using footnotes to provide
additional information. For a sample Item 10 table, see Appendix A. For each
financing arrangement, state:
(1) What the
financing covers (for example, the initial franchise fee, site acquisition,
construction or remodeling, initial or replacement equipment or fixtures,
opening or ongoing inventory or supplies, or other continuing
expenses).7
(2) The identity of each lender providing
financing and their relationship to the franchisor (for example,
affiliate).
(3) The amount of
financing offered or, if the amount depends on an actual cost that may vary,
the percentage of the cost that will be financed.
(4) The rate of interest, plus finance
charges, expressed on an annual basis. If the rate of interest, plus finance
charges, expressed on an annual basis, may differ depending on when the
financing is issued, state what that rate was on a specified recent
date.
(5) The number of payments or
the period of repayment.
(6) The
nature of any security interest required by the lender.
(7) Whether a person other than the
franchisee must personally guarantee the debt.
(8) Whether the debt can be prepaid and the
nature of any prepayment penalty.
(9) The franchisee's potential liabilities
upon default, including any:
(a) Accelerated
obligation to pay the entire amount due;
(b) Obligations to pay court costs and
attorney's fees incurred in collecting the debt;
(c) Termination of the franchise;
and
(d) Liabilities from cross
defaults such as those resulting directly from nonpayment, or indirectly from
the loss of business property.
(10) Other material financing
terms.
b. Disclose
whether the loan agreement requires franchisees to waive defenses or other
legal rights (for example, confession of judgment), or bars franchisees from
asserting a defense against the lender, the lender's assignee or the
franchisor. If so, describe the relevant provisions.
c. Disclose whether the franchisor's practice
or intent is to sell, assign, or discount to a third party all or part of the
financing arrangement. If so, state:
(1) The
assignment terms, including whether the franchisor will remain primarily
obligated to provide the financed goods or services; and
(2) That the franchisee may lose all its
defenses against the lender as a result of the sale or assignment.
d. Disclose whether the franchisor
or an affiliate receives any consideration for placing financing with the
lender. If such payments exist:
(1) Disclose
the amount or the method of determining the payment; and
(2) Identify the source of the payment and
the relationship of the source to the franchisor or its affiliates.
11. Item 11:
Franchisor's Assistance, Advertising, Computer Systems, and Training.
Disclose the franchisor's principal assistance and related obligations of both the franchisor and franchisee as follows. For each obligation, cite the section number of the franchise agreement imposing the obligation. Begin by stating the following sentence in bold type: "Except as listed below, [the franchisor] is not required to provide you with any assistance."
a. Disclose the
franchisor's pre-opening obligations to the franchisee, including any
assistance in:
(1) Locating a site and
negotiating the purchase or lease of the site. If such assistance is provided,
state:
(a) Whether the franchisor generally
owns the premises and leases it to the franchisee.
(b) Whether the franchisor selects the site
or approves an area in which the franchisee selects a site. If so, state
further whether and how the franchisor must approve a franchisee-selected
site.
(c) The factors that the
franchisor considers in selecting or approving sites (for example, general
location and neighborhood, traffic patterns, parking, size, physical
characteristics of existing buildings, and lease terms).
(d) The time limit for the franchisor to
locate or approve or disapprove the site and the consequences if the franchisor
and franchisee cannot agree on a site.
(2) Conforming the premises to local
ordinances and building codes and obtaining any required permits.
(3) Constructing, remodeling, or decorating
the premises.
(4) Hiring and
training employees.
(5) Providing
for necessary equipment, signs, fixtures, opening inventory, and supplies. If
any such assistance is provided, state:
(a)
Whether the franchisor provides these items directly or only provides the names
of approved suppliers.
(b) Whether
the franchisor provides written specifications for these items.
(c) Whether the franchisor delivers or
installs these items.
b. Disclose the typical length of time
between the earlier of the signing of the franchise agreement or the first
payment of consideration for the franchise and the opening of the franchisee's
business. Describe the factors that may affect the time period, such as ability
to obtain a lease, financing or building permits, zoning and local ordinances,
weather conditions, shortages, or delayed installation of equipment, fixtures,
and signs.
c. Disclose the
franchisor's obligations to the franchisee during the operation of the
franchise, including any assistance in:
(1)
Developing products or services the franchisee will offer to its
customers.
(2) Hiring and training
employees.
(3) Improving and
developing the franchised business.
(4) Establishing prices.
(5) Establishing and using administrative,
bookkeeping, accounting, and inventory control procedures.
(6) Resolving operating problems encountered
by the franchisee.
d.
Describe the advertising program for the franchise system, including the
following:
(1) The franchisor's obligation to
conduct advertising, including:
(a) The media
the franchisor may use.
(b) Whether
media coverage is local, regional, or national.
(c) The source of the advertising (for
example, an in-house advertising department or a national or regional
advertising agency).
(d) Whether
the franchisor must spend any amount on advertising in the area or territory
where the franchisee is located.
(2) The circumstances when the franchisor
will permit franchisees to use their own advertising material.
(3) Whether there is an advertising council
composed of franchisees that advises the franchisor on advertising policies. If
so, disclose:
(a) How members of the council
are selected.
(b) Whether the
council serves in an advisory capacity only or has operational or
decision-making power.
(c) Whether
the franchisor has the power to form, change, or dissolve the advertising
council.
(4) Whether the
franchisee must participate in a local or regional advertising cooperative. If
so, state:
(a) How the area or membership of
the cooperative is defined.
(b) How
much the franchisee must contribute to the fund and whether other franchisees
must contribute a different amount or at a different rate.
(c) Whether the franchisor-owned outlets must
contribute to the fund and, if so, whether those contributions are on the same
basis as those for franchisees.
(d)
Who is responsible for administering the cooperative (for example, franchisor,
franchisees, or advertising agency).
(e) Whether cooperatives must operate from
written governing documents and whether the documents are available for the
franchisee to review.
(f) Whether
cooperatives must prepare annual or periodic financial statements and whether
the statements are available for review by the franchisee.
(g) Whether the franchisor has the power to
require cooperatives to be formed, changed, dissolved, or merged.
(5) Whether the franchisee must
participate in any other advertising fund. If so, state:
(a) Who contributes to the fund.
(b) How much the franchisee must contribute
to the fund and whether other franchisees must contribute a different amount or
at a different rate.
(c) Whether
the franchisor-owned outlets must contribute to the fund and, if so, whether it
is on the same basis as franchisees.
(d) Who administers the fund.
(e) Whether the fund is audited and when it
is audited.
(f) Whether financial
statements of the fund are available for review by the franchisee.
(g) How the funds were used in the most
recently concluded fiscal year, including the percentages spent on production,
media placement, administrative expenses, and a description of any other
use.
(6) If not all
advertising funds are spent in the fiscal year in which they accrue, how the
franchisor uses the remaining amount, including whether franchisees receive a
periodic accounting of how advertising fees are spent.
(7) The percentage of advertising funds, if
any, that the franchisor uses principally to solicit new franchise
sales.
e. Disclose
whether the franchisor requires the franchisee to buy or use electronic cash
registers or computer systems. If so, describe the systems generally in
nontechnical language, including the types of data to be generated or stored in
these systems, and state the following:
(1)
The cost of purchasing or leasing the systems.
(2) Any obligation of the franchisor, any
affiliate, or third party to provide ongoing maintenance, repairs, upgrades, or
updates.
(3) Any obligations of the
franchisee to upgrade or update any system during the term of the franchise,
and, if so, any contractual limitations on the frequency and cost of the
obligation.
(4) The annual cost of
any optional or required maintenance, updating, upgrading, or support
contracts.
(5) Whether the
franchisor will have independent access to the information that will be
generated or stored in any electronic cash register or computer system. If so,
describe the information that the franchisor may access and whether there are
any contractual limitations on the franchisor's right to access the
information.
f. Disclose
the table of contents of the franchisor's operating manual provided to
franchisees as of the franchisor's last fiscal year-end or a more recent date.
State the number of pages devoted to each subject and the total number of pages
in the manual as of this date. This disclosure may be omitted if the franchisor
offers the prospective franchisee the opportunity to view the manual before
buying the franchise.
g. Disclose
the franchisor's training program as of the franchisor's last fiscal year-end
or a more recent date.
(1) Describe the
training program in the following tabular form. Title the table "TRAINING
PROGRAM" in capital letters and bold type.
| Item 11 Table TRAINING PROGRAM | |||
| Column 1 | Column 2 | Column 3 | Column 4 |
| Subject | Hours of Classroom Training | Hours of On-The-Job Training | Location |
(a) In column
1, state the subjects taught.
(b)
In column 2, state the hours of classroom training for each subject.
(c) In column 3, state the hours of
on-the-job training for each subject.
(d) In column 4, state the location of the
training for each subject.
(2) State further:
(a) How often training classes are held and
the nature of the location or facility where training is held (for example,
company, home, office, franchisor-owned store).
(b) The nature of instructional materials and
the instructor's experience, including the instructor's length of experience in
the field and with the franchisor. State only experience relevant to the
subject taught and the franchisor's operations.
(c) Any charges franchisees must pay for
training and who must pay travel and living expenses of the training program
enrollees.
(d) Who may and who must
attend training. State whether the franchisee or other persons must complete
the program to the franchisor's satisfaction. If successful completion is
required, state how long after signing the agreement or before opening the
business the training must be completed. If training is not mandatory, state
the percentage of new franchisees that enrolled in the training program during
the preceding 12 months.
(e)
Whether additional training programs or refresher courses are
required.
12. Item 12: Territory.
Disclose:
a. Whether
the franchise is for a specific location or a location to be approved by the
franchisor.
b. Any minimum
territory granted to the franchisee (for example, a specific radius, a distance
sufficient to encompass a specified population, or another specific
designation).
c. The conditions
under which the franchisor will approve the relocation of the franchised
business or the franchisee's establishment of additional franchised
outlets.
d. Franchisee options,
rights of first refusal, or similar rights to acquire additional
franchises.
e. Whether the
franchisor grants an exclusive territory.
(1)
If the franchisor does not grant an exclusive territory, state: "You will not
receive an exclusive territory. You may face competition from other
franchisees, from outlets that we own, or from other channels of distribution
or competitive brands that we control."
(2) If the franchisor grants an exclusive
territory, disclose:
(a) Whether continuation
of territorial exclusivity depends on achieving a certain sales volume, market
penetration, or other contingency, and the circumstances when the franchisee's
territory may be altered. Describe any sales or other conditions. State the
franchisor's rights if the franchisee fails to meet the requirements.
(b) Any other circumstances that permit the
franchisor to modify the franchisee's territorial rights (for example, a
population increase in the territory giving the franchisor the right to grant
an additional franchise in the area) and the effect of such modifications on
the franchisee's rights.
f. For all territories (exclusive and
nonexclusive):
(1) Any restrictions on the
franchisor from soliciting or accepting orders from consumers inside the
franchisee's territory, including:
(a) Whether
the franchisor or an affiliate has used or reserves the right to use other
channels of distribution such as the Internet, catalog sales, telemarketing, or
other direct marketing sales to make sales within the franchisee's territory
using the franchisor's principal trademarks.
(b) Whether the franchisor or an affiliate
has used or reserves the right to use other channels of distribution such as
the Internet, catalog sales, telemarketing, or other direct marketing to make
sales within the franchisee's territory of products or services under
trademarks different from the ones the franchisee will use under the franchise
agreement.
(c) Any compensation
that the franchisor must pay for soliciting or accepting orders from inside the
franchisee's territory.
(2) Any restrictions on the franchisee from
soliciting or accepting orders from consumers outside of his territory,
including whether the franchisee has the right to use other channels of
distribution such as the Internet, catalog sales, telemarketing, or other
direct marketing to make sales outside of his territory.
(3) If the franchisor or an affiliate
operates, franchises, or has plans to operate or franchise a business under a
different trademark and that business sells or will sell goods or services
similar to those the franchisee will offer, describe:
(a) The similar goods and services.
(b) The different trademark.
(c) Whether outlets will be franchisor-owned
or -operated.
(d) Whether the
franchisor or its franchisees who use the different trademark will solicit or
accept orders within the franchisee's territory.
(e) The timetable for the plan.
(f) How the franchisor will resolve conflicts
between the franchisor and franchisees and between the franchisees of each
system regarding territory, customers, and franchisor support.
(g) The principal business address of the
franchisor's similar operating business. If it is the same as the franchisor's
principal business address stated in Item 1, disclose whether the franchisor
maintains (or plans to maintain) physically separate offices and training
facilities for the similar competing business.
13. Item 13: Trademarks.
a. Disclose each principal trademark to be
licensed to the franchisee. For this item, "principal trademark" means the
primary trademarks, service marks, names, logos, and commercial symbols the
franchisee will use to identify the franchised business. It may not include
every trademark the franchisor owns.
b. Disclose whether each principal trademark
is registered with the United States Patent and Trademark Office. If so, state:
(1) The date and identification number of
each trademark registration.
(2)
Whether the franchisor has filed all required affidavits.
(3) Whether any registration has been
renewed.
(4) Whether the principal
trademarks are registered on the Principal or Supplemental Register of the
United States Patent and Trademark Office.
c. If the principal trademark is not
registered with the United States Patent and Trademark Office, state whether
the franchisor has filed any trademark application, including any "intent to
use" application or an application based on actual use. If so, state the date
and identification number of the application.
d. If the trademark is not registered on the
Principal Register of the United States Patent and Trademark Office, state: "We
do not have a federal registration for our principal trademark. Therefore, our
trademark does not have many legal benefits and rights as a federally
registered trademark. If our right to use the trademark is challenged, you may
have to change to an alternative trademark, which may increase your
expenses."
e. Disclose any
currently effective material determinations of the United States Patent and
Trademark Office, the Trademark Trial and Appeal Board, or any state trademark
administrator or court; and any pending infringement, opposition, or
cancellation proceeding. Include infringement, opposition, or cancellation
proceedings in which the franchisor unsuccessfully sought to prevent
registration of a trademark in order to protect a trademark licensed by the
franchisor. Describe how the determination affects the ownership, use, or
licensing of the trademark.
f.
Disclose any pending material federal or state court litigation regarding the
franchisor's use or ownership rights in a trademark. For each pending action,
disclose:8
(1) The
forum and case number.
(2) The
nature of claims made opposing the franchisor's use of the trademark or by the
franchisor opposing another person's use of the trademark.
(3) Any effective court or administrative
agency ruling in the matter.
g. Disclose any currently effective
agreements that significantly limit the franchisor's rights to use or license
the use of trademarks listed in this section in a manner material to the
franchise. For each agreement, disclose:
(1)
The manner and extent of the limitation or grant.
(2) The extent to which the agreement may
affect the franchisee.
(3) The
agreement's duration.
(4) The
parties to the agreement.
(5) The
circumstances when the agreement may be canceled or modified.
(6) All other material terms.
h. Disclose:
(1) Whether the franchisor must protect the
franchisee's right to use the principal trademarks listed in this section, and
must protect the franchisee against claims of infringement or unfair
competition arising out of the franchisee's use of the trademarks.
(2) The franchisee's obligation to notify the
franchisor of the use of, or claims of rights to, a trademark identical to or
confusingly similar to a trademark licensed to the franchisee.
(3) Whether the franchise agreement requires
the franchisor to take affirmative action when notified of these uses or
claims.
(4) Whether the franchisor
or franchisee has the right to control any administrative proceedings or
litigation involving a trademark licensed by the franchisor to the
franchisee.
(5) Whether the
franchise agreement requires the franchisor to participate in the franchisee's
defense and/or indemnify the franchisee for expenses or damages if the
franchisee is a party to an administrative or judicial proceeding involving a
trademark licensed by the franchisor to the franchisee, or if the proceeding is
resolved unfavorably to the franchisee.
(6) The franchisee's rights under the
franchise agreement if the franchisor requires the franchisee to modify or
discontinue using a trademark.
i. Disclose whether the franchisor knows of
either superior prior rights or infringing uses that could materially affect
the franchisee's use of the principal trademarks in the state where the
franchised business will be located. For each use of a principal trademark that
the franchisor believes is an infringement that could materially affect the
franchisee's use of a trademark, disclose:
(1)
The nature of the infringement.
(2)
The locations where the infringement is occurring.
(3) The length of time of the infringement
(to the extent known).
(4) Any
action taken or anticipated by the franchisor.
14. Item 14: Patents, Copyrights, and
Proprietary Information.
a. Disclose whether
the franchisor owns rights in, or licenses to, patents or copyrights that are
material to the franchise. Also, disclose whether the franchisor has any
pending patent applications that are material to the franchise. If so, state:
(1) The nature of the patent, patent
application, or copyright and its relationship to the franchise.
(2) For each patent:
(a) The duration of the patent.
(b) The type of patent (for example,
mechanical, process, or design).
(c) The patent number, issuance date, and
title.
(3) For each
patent application:
(a) The type of patent
application (for example, mechanical, process, or design).
(b) The serial number, filing date, and
title.
(4) For each
copyright:
(a) The duration of the
copyright.
(b) The registration
number and date.
(c) Whether the
franchisor can and intends to renew the copyright.
b. Describe any current material
determination of the United States Patent and Trademark Office, the United
States Copyright Office, or a court regarding the patent or copyright. Include
the forum and matter number. Describe how the determination affects the
franchised business.
c. State the
forum, case number, claims asserted, issues involved, and effective
determinations for any material proceeding pending in the United States Patent
and Trademark Office or any court.9
d. If an agreement limits the use of the
patent, patent application, or copyright, state the parties to and duration of
the agreement, the extent to which the agreement may affect the franchisee, and
other material terms of the agreement.
e. Disclose the franchisor's obligation to
protect the patent, patent application, or copyright; and to defend the
franchisee against claims arising from the franchisee's use of patented or
copyrighted items, including:
(1) Whether the
franchisor's obligation is contingent upon the franchisee notifying the
franchisor of any infringement claims or whether the franchisee's notification
is discretionary.
(2) Whether the
franchise agreement requires the franchisor to take affirmative action when
notified of infringement.
(3) Who
has the right to control any litigation.
(4) Whether the franchisor must participate
in the defense of a franchisee or indemnify the franchisee for expenses or
damages in a proceeding involving a patent, patent application, or copyright
licensed to the franchisee.
(5)
Whether the franchisor's obligation is contingent upon the franchisee modifying
or discontinuing the use of the subject matter covered by the patent or
copyright.
(6) The franchisee's
rights under the franchise agreement if the franchisor requires the franchisee
to modify or discontinue using the subject matter covered by the patent or
copyright.
f. If the
franchisor knows of any patent or copyright infringement that could materially
affect the franchisee, disclose:
(1) The
nature of the infringement.
(2) The
locations where the infringement is occurring.
(3) The length of time of the infringement
(to the extent known).
(4) Any
action taken or anticipated by the franchisor.
g. If the franchisor claims proprietary
rights in other confidential information or trade secrets, describe in general
terms the proprietary information communicated to the franchisee and the terms
for use by the franchisee. The franchisor need only describe the general nature
of the proprietary information, such as whether a formula or recipe is
considered to be a trade secret.
15. Item 15: Obligation to Participate in the
Actual Operation of the Franchise Business.
a.
Disclose the franchisee's obligation to participate personally in the direct
operation of the franchisee's business and whether the franchisor recommends
participation. Include obligations arising from any written agreement or from
the franchisor's practice.
b. If
personal "on-premises" supervision is not required, disclose the following:
(1) If the franchisee is an individual,
whether the franchisor recommends on-premises supervision by the
franchisee.
(2) Limits on whom the
franchisee can hire as an on-premises supervisor.
(3) Whether an on-premises supervisor must
successfully complete the franchisor's training program.
(4) If the franchisee is a business entity,
the amount of equity interest, if any, that the on-premises supervisor must
have in the franchisee's business.
c. Disclose any restrictions that the
franchisee must place on its manager (for example, maintain trade secrets,
covenants not to compete).
16. Item 16: Restrictions on What the
Franchisee May Sell.
Disclose any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit access to customers, including:
a. Any
obligation on the franchisee to sell only goods or services approved by the
franchisor.
b. Any obligation on
the franchisee to sell all goods or services authorized by the
franchisor.
c. Whether the
franchisor has the right to change the types of authorized goods or services
and whether there are limits on the franchisor's right to make
changes.
17. Item 17:
Renewal, Termination, Transfer, and Dispute Resolution.
Disclose, in the following tabular form, a table that cross-references each enumerated franchise relationship item with the applicable provision in the franchise or related agreement. Title the table "THE FRANCHISE RELATIONSHIP" in capital letters and bold type.
a. Describe briefly each contractual
provision. If a particular item is not applicable, state "Not
Applicable."
b. If the agreement is
silent about one of the listed provisions, but the franchisor unilaterally
offers to provide certain benefits or protections to franchisees as a matter of
policy, use a footnote to describe the policy and state whether the policy is
subject to change.
c. In the
summary column for Item 17 c, state what the term "renewal" means for your
franchise system, including, if applicable, a statement that franchisees may be
asked to sign a contract with materially different terms and conditions than
their original contract.
| Item 17 Table THE FRANCHISE RELATIONSHIP | ||
| [In bold] This table lists certain important provisions of the franchise and related agreements. You should read these provisions in the agreements attached to this disclosure document. | ||
| Provision | Section in franchise or other agreement | Summary |
| a. Length of the franchise term | ||
| b. Renewal or extension of the term | ||
| c. Requirements for franchisee to renew or extend | ||
| d. Termination by franchisee | ||
| e. Termination by franchisor without cause | ||
| f. Termination by franchisor with cause | ||
| g. "Cause" defined - curable defaults | ||
| h. "Cause" defined - noncurable defaults | ||
| i. Franchisee's obligations on termination/nonrenewal | ||
| j. Assignment of contract by franchisor | ||
| k. "Transfer" by franchisee - defined | ||
| l. Franchisor approval of transfer by franchisee | ||
| m. Conditions for franchisor approval of transfer | ||
| n. Franchisor's right of first refusal to acquire franchisee's business | ||
| o. Franchisor's option to purchase franchisee's business | ||
| p. Death or disability of franchisee | ||
| q. Noncompetition covenants during the term of the franchise | ||
| r. Noncompetition covenants after the franchise is terminated or expires | ||
| s. Modification of the agreement | ||
| t. Integration/merger clause | ||
| u. Dispute resolution by arbitration or mediation | ||
| v. Choice of forum | ||
| w. Choice of law | ||
18. Item 18: Public Figures.
Disclose:
a. Any
compensation or other benefit given or promised to a public figure arising from
either the use of the public figure in the franchise name or symbol, or the
public figure's endorsement or recommendation of the franchise to prospective
franchisees.
b. The extent to which
the public figure is involved in the management or control of the franchisor.
Describe the public figure's position and duties in the franchisor's business
structure.
c. The public figure's
total investment in the franchisor, including the amount the public figure
contributed in services performed or to be performed. State the type of
investment (for example, common stock, promissory note).
d. For purposes of this section, a public
figure means a person whose name or physical appearance is generally known to
the public in the geographic area where the franchise will be
located.
19. Item 19:
Financial Performance Representations.
a.
Begin by stating the following:
The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only if:
(i) a
franchisor provides the actual records of an existing outlet you are
considering buying; or
(ii) a
franchisor supplements the information provided in this Item 19, for example,
by providing information about possible performance at a particular location or
under particular circumstances.
b. If a franchisor does not provide any
financial performance representation in Item 19, also state:
We do not make any representations about a franchisee's future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor's management by contacting [name, address, and telephone number], the Federal Trade Commission, and the appropriate state regulatory agencies.
c. If the
franchisor makes any financial performance representation to prospective
franchisees, the franchisor must have a reasonable basis and written
substantiation for the representation at the time the representation is made
and must state the representation in the Item 19 disclosure. The franchisor
must also disclose the following:
(1) Whether
the representation is an historic financial performance representation about
the franchise system's existing outlets, or a subset of those outlets, or is a
forecast of the prospective franchisee's future financial
performance.
(2) If the
representation relates to past performance of the franchise system's existing
outlets, the material basis for the representation, including:
(a) Whether the representation relates to the
performance of all of the franchise system's existing outlets or only to a
subset of outlets that share a particular set of characteristics (for example,
geographic location, type of location such as free standing vs. shopping
center, degree of competition, length of time the outlets have operated,
services or goods sold, services supplied by the franchisor, and whether the
outlets are franchised or franchisor-owned or -operated).
(b) The dates when the reported level of
financial performance was achieved.
(c) The total number of outlets that existed
in the relevant period and, if different, the number of outlets that had the
described characteristics.
(d) The
number of outlets with the described characteristics whose actual financial
performance data were used in arriving at the representation.
(e) Of those outlets whose data were used in
arriving at the representation, the number and percent that actually attained
or surpassed the stated results.
(f) Characteristics of the included outlets,
such as those characteristics noted in subdivision c (2)(a) of Item 19, that
may differ materially from those of the outlet that may be offered to a
prospective franchisee.
(3) If the representation is a forecast of
future financial performance, state the material basis and assumptions on which
the projection is based. The material assumptions underlying a forecast include
significant factors upon which a franchisee's future results are expected to
depend. These factors include, for example, economic or market conditions that
are basic to a franchisee's operation, and encompass matters affecting, among
other things, a franchisee's sales, the cost of goods or services sold, and
operating expenses.
(4) A clear and
conspicuous admonition that a new franchisee's individual financial results may
differ from the result stated in the financial performance
representation.
(5) A statement
that written substantiation for the financial performance representation will
be made available to the prospective franchisee upon reasonable
request.
d. If a
franchisor wishes to disclose only the actual operating results for a specific
outlet being offered for sale, it need not comply with this section, provided
the information is given only to potential purchasers of that outlet.
e. If a franchisor furnishes financial
performance information according to this section, the franchisor may deliver
to a prospective franchisee a supplemental financial performance representation
about a particular location or variation, apart from the disclosure document.
The supplemental representation must:
(1) Be
in writing.
(2) Explain the
departure from the financial performance representation in the disclosure
document.
(3) Be prepared in
accordance with the requirements of subdivision c (1) through (4) of this
item.
(4) Be furnished to the
prospective franchisee.
20. Item 20: Outlets and Franchisee
Information.
a. Disclose, in the following
tabular form, the total number of franchised and company-owned outlets for each
of the franchisor's last three fiscal years. For this item, "outlet" includes
outlets of a type substantially similar to that offered to the prospective
franchisee. A sample Item 20a table is attached as Appendix B.
| Table No. 1 Systemwide Outlet Summary For years [--] to [--] | ||||
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
| Outlet Type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
| Franchised | 2004 | |||
| 2005 | ||||
| 2006 | ||||
| Company-Owned | 2004 | |||
| 2005 | ||||
| 2006 | ||||
| Total Outlets | 2004 | |||
| 2005 | ||||
| 2006 | ||||
(1) In column
1, include three outlet categories titled "franchised," "company-owned," and
"total outlets."
(2) In column 2,
state the last three fiscal years.
(3) In column 3, state the total number of
each type of outlet operating at the beginning of each fiscal year.
(4) In column 4, state the total number of
each type of outlet operating at the end of each fiscal year.
(5) In column 5, state the net change, and
indicate whether the change is positive or negative, for each type of outlet
during each fiscal year.
b. Disclose, in the following tabular form,
the number of franchised and company-owned outlets and changes in the number
and ownership of outlets located in each state during each of the last three
fiscal years. Except as noted, each change in ownership shall be reported only
once in the following tables. If multiple events occurred in the process of
transferring ownership of an outlet, report the event that occurred last in
time. If a single outlet changed ownership two or more times during the same
fiscal year, use footnotes to describe the types of changes involved and the
order in which the changes occurred.
(1)
Disclose, in the following tabular form, the total number of franchised outlets
transferred in each state during each of the franchisor's last three fiscal
years. For this item, "transfer" means the acquisition of a controlling
interest in a franchised outlet, during its term, by a person other than the
franchisor or an affiliate. A sample Item 20 b Table is attached as Appendix C.
| Table No. 2 Transfers of Outlets from Franchisees to New Owners (other than the Franchisor) For years [--] to [--] | ||
| Column 1 | Column 2 | Column 3 |
| State | Year | Number of Transfers |
| 2004 | ||
| 2005 | ||
| 2006 | ||
| 2004 | ||
| 2005 | ||
| 2006 | ||
| Total | 2004 | |
| 2005 | ||
| 2006 | ||
(a) In column
1, list each state with one or more franchised outlets.
(b) In column 2, state the last three fiscal
years.
(c) In column 3, state the
total number of completed transfers in each state during each fiscal
year.
(2) Disclose, in
the following tabular form, the status of franchisee-owned outlets located in
each state for each of the franchisor's last three fiscal years. A sample Item
20 c table is attached as Appendix D.
| Table No. 3 Status of Franchised Outlets For years [--] to [--] | ||||||||
| Col. 1 | Col. 2 | Col. 3 | Col. 4 | Col. 5 | Col. 6 | Col. 7 | Col. 8 | Col. 9 |
| State | Year | Outlets at Start of Year | Outlets Opened | Terminations | Nonrenewals | Reacquired by Franchisor | Ceased Operations- Other Reasons | Outlets at End of the Year |
| 2004 | ||||||||
| 2005 | ||||||||
| 2006 | ||||||||
| 2004 | ||||||||
| 2005 | ||||||||
| 2006 | ||||||||
| Totals | ||||||||
(a) In column
1, list each state with one or more franchised outlets.
(b) In column 2, state the last three fiscal
years.
(c) In column 3, state the
total number of franchised outlets in each state at the start of each fiscal
year.
(d) In column 4, state the
total number of franchised outlets opened in each state during each fiscal
year. Include both new outlets and existing company-owned outlets that a
franchisee purchased from the franchisor. (Also report the number of existing
company-owned outlets that are sold to a franchisee in Column 7 of Table
4).
(e) In column 5, state the
total number of franchised outlets that were terminated in each state during
each fiscal year. For purposes of this item, "termination" means the
franchisor's termination of a franchise agreement prior to the end of its term
and without providing any consideration to the franchisee (whether by payment
or forgiveness or assumption of debt).
(f) In column 6, state the total number of
nonrenewals in each state during each fiscal year. For purposes of this item,
"nonrenewal" occurs when the franchise agreement for a franchised outlet is not
renewed at the end of its term.
(g)
In column 7, state the total number of franchised outlets reacquired by the
franchisor in each state during each fiscal year. For purposes of this item, a
"reacquisition" means the franchisor's acquisition for consideration (whether
by payment or forgiveness or assumption of debt) of a franchised outlet during
its term. (Also report franchised outlets reacquired by the franchisor in
column 5 of Table 4).
(h) In column
8, state the total number of outlets in each state not operating as one of the
franchisor's outlets at the end of each fiscal year for reasons other than
termination, nonrenewal, or reacquisition by the franchisor.
(i) In column 9, state the total number of
franchised outlets in each state at the end of the fiscal year.
(3) Disclose, in the following
tabular form, the status of company-owned outlets located in each state for
each of the franchisor's last three fiscal years. A sample Item 20 d table is
attached as Appendix E.
| Table No. 4 Status of Company-Owned Outlets For years [--] to [--] | |||||||
| Col. 1 | Col. 2 | Col. 3 | Col. 4 | Col. 5 | Col. 6 | Col. 7 | Col. 8 |
| State | Year | Outlets at Start of the Year | Outlets Opened | Outlets Reacquired From Franchisee | Outlets Closed | Outlets Sold to Franchisee | Outlets at End of the Year |
| 2004 | |||||||
| 2005 | |||||||
| 2006 | |||||||
| 2004 | |||||||
| 2005 | |||||||
| 2006 | |||||||
| Totals | 2004 | ||||||
| 2005 | |||||||
| 2006 | |||||||
(a) In column
1, list each state with one or more company-owned outlets.
(b) In column 2, state the last three fiscal
years.
(c) In column 3, state the
total number of company-owned outlets in each state at the start of the fiscal
year.
(d) In column 4, state the
total number of company-owned outlets opened in each state during each fiscal
year.
(e) In column 5, state the
total number of franchised outlets reacquired from franchisees in each state
during each fiscal year.
(f) In
column 6, state the total number of company-owned outlets closed in each state
during each fiscal year. Include both actual closures and instances when an
outlet ceases to operate under the franchisor's trademark.
(g) In column 7, state the total number of
company-owned outlets sold to franchisees in each state during each fiscal
year.
(h) In column 8, state the
total number of company-owned outlets operating in each state at the end of
each fiscal year.
c. Disclose, in the following tabular form,
projected new franchised and company-owned outlets. A sample Item 20 e table is
attached as Appendix F.
| Table No. 5 Projected Openings As Of [Last Day of Last Fiscal Year] | |||
| Column 1 | Column 2 | Column 3 | Column 4 |
| State | Franchise Agreements Signed But Outlet Not Opened | Projected New Franchised Outlet In The Next Fiscal Year | Projected New Company-Owned Outlet In the Next Fiscal Year |
| Total | |||
(1) In column
1, list each state where one or more franchised or company-owned outlets are
located or are projected to be located.
(2) In column 2, state the total number
franchise agreements that had been signed for new outlets to be located in each
state as of the end of the previous fiscal year where the outlet had not yet
opened.
(3) In column 3, state the
total number of new franchised outlets in each state projected to be opened
during the next fiscal year.
(4) In
column 4, state the total number of new company-owned outlets in each state
that are projected to be opened during the next fiscal year.
d. Disclose the names of all
current franchisees and the address and telephone number of each of their
outlets. Alternatively, disclose this information for all franchised outlets in
the state, but if these franchised outlets total fewer than 100, disclose this
information for franchised outlets from contiguous states and then the next
closest states until at least 100 franchised outlets are listed.
e. Disclose the name, city and state, and
current business telephone number, or if unknown, the last known home telephone
number of every franchisee who had an outlet terminated, canceled, not renewed,
or otherwise voluntarily or involuntarily ceased to do business under the
franchise agreement during the most recently completed fiscal year or who has
not communicated with the franchisor within 10 weeks of the disclosure document
issuance date.10 State in immediate conjunction with
this information: "If you buy this franchise, your contact information may be
disclosed to other buyers when you leave the franchise system."
f. If a franchisor is selling a
previously-owned franchised outlet now under its control, disclose the
following additional information for that outlet for the last five fiscal
years. This information may be attached as an addendum to a disclosure
document, or, if disclosure has already been made, then in a supplement to the
previously furnished disclosure document.
(1)
The name, city and state, current business telephone number, or if unknown,
last known home telephone number of each previous owner of the
outlet;
(2) The time period when
each previous owner controlled the outlet;
(3) The reason for each previous change in
ownership (for example, termination, nonrenewal, voluntary transfer, ceased
operations); and
(4) The time
period(s) when the franchisor retained control of the outlet (for example,
after termination, nonrenewal, or reacquisition).
g. Disclose whether franchisees signed
confidentiality clauses during the last three fiscal years. If so, state the
following: "In some instances, current and former franchisees sign provisions
restricting their ability to speak openly about their experience with [name of
franchise system]. You may wish to speak with current and former franchisees,
but be aware that not all such franchisees will be able to communicate with
you." Franchisors may also disclose the number and percentage of current and
former franchisees who during each of the last three fiscal years signed
agreements that include confidentiality clauses and may disclose the
circumstances under which such clauses were signed.
h. Disclose, to the extent known, the name,
address, telephone number, email address, and website address (to the extent
known) of each trademark-specific franchisee organization associated with the
franchise system being offered, if such organization:
(1) Has been created, sponsored, or endorsed
by the franchisor. If so, state the relationship between the organization and
the franchisor (for example, the organization was created by the franchisor,
sponsored by the franchisor, or endorsed by the franchisor).
(2) Is incorporated or otherwise organized
under state law and asks the franchisor to be included in the franchisor's
disclosure document during the next fiscal year. Such organizations must renew
their request on an annual basis by submitting a request no later than 60 days
after the close of the franchisor's fiscal year. The franchisor has no
obligation to verify the organization's continued existence at the end of each
fiscal year. Franchisors may also include the following statement: "The
following independent franchisee organizations have asked to be included in
this disclosure document."
21. Item 21: Financial Statements.
a. Include the following financial statements
prepared according to United States generally accepted accounting principles,
as revised by any future United States government mandated accounting
principles, or as permitted by the Securities and Exchange Commission. Except
as provided in subdivision b of this item, these financial statements must be
audited by an independent certified public accountant using generally accepted
United States auditing standards. Present the required financial statements in
a tabular form that compares at least two fiscal years.
(1) The franchisor's balance sheet for the
previous two fiscal year-ends before the disclosure document issuance
date.
(2) Statements of operations,
stockholders equity, and cash flows for each of the franchisor's previous three
fiscal years.
(3) Instead of the
financial disclosures required by subdivisions a (1) and (2) of this item, the
franchisor may include financial statements of any of its affiliates if the
affiliate's financial statements satisfy subdivisions a (1) and (2) of this
item and the affiliate absolutely and unconditionally guarantees to assume the
duties and obligations of the franchisor under the franchise agreement. The
affiliate's guarantee must cover all of the franchisor's obligations to the
franchisee, but need not extend to third parties. If this alternative is used,
attach a copy of the guarantee to the disclosure document.
(4) When a franchisor owns a direct or
beneficial controlling financial interest in a subsidiary, its financial
statements should reflect the financial condition of the franchisor and its
subsidiary.
(5) Include separate
financial statements for the franchisor and any subfranchisor, as well as for
any parent that commits to perform postsale obligations for the franchisor or
guarantees the franchisor's obligations. Attach a copy of any guarantee to the
disclosure document.
b.
A start-up franchise system may phase-in the use of the financial statements
specified in subdivisions a (1) and (2) of this item by providing, at a
minimum, the following statements at the indicated times:
| (1) The franchisor's first partial or full fiscal year selling franchises. | An audited opening balance sheet. |
| (2) The franchisor's second fiscal year selling franchises. | Audited balance sheet opinion as of the end of the first partial or full fiscal year selling franchises. |
| (3) The franchisor's third and subsequent fiscal years selling franchises. | All required financial statements for the previous fiscal year, plus any previously disclosed audited statements that still must be disclosed according to subdivisions a (1) and (2) of this item. |
(4) Start-up
franchisors may phase-in the disclosure of all financial statements required in
subdivisions a (1) and (2) of this item, provided the franchisor:
(a) Prepares audited statements of
operations, stockholders equity, and cash flows as soon as
practicable.
(b) Prepares all
unaudited statements in a format that conforms as closely as possible to
audited statements.
(c) Includes
one or more years of unaudited statements of operations or clearly and
conspicuously discloses in this section that the franchisor has not been in
business for three years or more, and cannot include all financial statements
required in subdivisions a (1) and (2) of this item.
22. Item 22: Contracts.
Attach a copy of all proposed agreements regarding the franchise offering, including the franchise agreement and any lease, options, and purchase agreements.
23. Item 23: Receipts.
Include two copies of the following detachable acknowledgment of receipt in the following form as the last pages of the disclosure document:
a. State the following:
Receipt
This disclosure document summarizes certain provisions of the franchise agreement and other information in plain language. Read this disclosure document and all agreements carefully.
If [name of franchisor] offers you a franchise, it must provide this disclosure document to you 14 calendar days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
If [name of franchisor] does not deliver this disclosure document on time or if it contains a false or misleading statement, or a material omission, a violation of federal law and state law may have occurred and should be reported to the Federal Trade Commission, Washington, D.C. 20580 and [state agency].
b.
Disclose the name, principal business address, and telephone number of each
franchise seller offering the franchise.
c. State the issuance date.
d. If not disclosed in Item 1, state the name
and address of the franchisor's registered agent authorized to receive service
of process.
e. State the following:
I received a disclosure document dated that included the following Exhibits:
f. List
the title(s) of all attached Exhibits.
g. Provide space for the prospective
franchisee's signature and date.
h.
Franchisors may include any specific instructions for returning the receipt
(for example, street address, email address, facsimile telephone number).
| Appendix A: Sample Item 10 Table Summary of Financing Offered | ||||||||||
| Item Financed | Source of Financing | Down Payment | Amount Financed | Term (Yrs) | Interest Rate | Monthly Payment | Prepay Penalty | Security Required | Liability Upon Default | Loss of Legal Right on Default |
| Initial Fee | ||||||||||
| Land/ Constr | ||||||||||
| Leased Space | ||||||||||
| Equip. Lease | ||||||||||
| Equip. Purchase | ||||||||||
| Opening Inventory | ||||||||||
| Other Financing | ||||||||||
| Appendix B: Sample Item 20(1) Table - Systemwide Outlet Summary Systemwide Outlet Summary For years 2004 to 2006 | ||||
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
| Outlet Type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
| Franchised | 2004 | 859 | 1,062 | +203 |
| 2005 | 1,062 | 1,296 | +234 | |
| 2006 | 1,296 | 2,720 | +1,424 | |
| Company Owned | 2004 | 125 | 145 | +20 |
| 2005 | 145 | 76 | -69 | |
| 2006 | 76 | 141 | +65 | |
| Total Outlets | 2004 | 984 | 1,207 | +223 |
| 2005 | 1,207 | 1,372 | +165 | |
| 2006 | 1,372 | 2,861 | +1,489 | |
| Appendix C: Sample Item 20(2) Table - Transfers of Franchised Outlets Transfers of Outlets from Franchisees to New Owners (other than the Franchisor) For years 2004 to 2006 | ||
| Column 1 | Column 2 | Column 3 |
| State | Year | Number of Transfers |
| NC | 2004 | 1 |
| 2005 | 0 | |
| 2006 | 2 | |
| SC | 2004 | 0 |
| 2005 | 0 | |
| 2006 | 2 | |
| Total | 2004 | 1 |
| 2005 | 0 | |
| 2006 | 4 | |
| Appendix D: Sample Item 20(3) Table - Status of Franchise Outlets Status of Franchise Outlets For years 2004 to 2006 | ||||||||
| Col. 1 | Col. 2 | Col. 3 | Col. 4 | Col. 5 | Col. 6 | Col. 7 | Col. 8 | Col. 9 |
| State | Year | Outlets at Start of Year | Outlets Opened | Terminations | Non-Renewals | Reacquired by Franchisor | Ceased Operations-Other Reasons | Outlets at End of the Year |
| AL | 2004 | 10 | 2 | 1 | 0 | 0 | 1 | 10 |
| 2005 | 11 | 5 | 0 | 1 | 0 | 0 | 15 | |
| 2006 | 15 | 4 | 1 | 0 | 1 | 2 | 15 | |
| AZ | 2004 | 20 | 5 | 0 | 0 | 0 | 0 | 25 |
| 2005 | 25 | 4 | 1 | 0 | 0 | 2 | 26 | |
| 2006 | 26 | 4 | 0 | 0 | 0 | 0 | 30 | |
| Totals | 2004 | 30 | 7 | 1 | 0 | 0 | 1 | 35 |
| 2005 | 36 | 9 | 1 | 1 | 0 | 2 | 41 | |
| 2006 | 41 | 8 | 1 | 0 | 1 | 2 | 45 | |
| Appendix E: Sample Item 20(4) Table - Status of Company-Owned Outlets Status of Company-Owned Outlets For years 2004 to 2006 | |||||||
| Col. 1 | Col 2 | Col. 3 | Col. 4 | Col. 5 | Col. 6 | Col. 7 | Col. 8 |
| State | Year | Outlets at Start of the Year | Outlets Opened | Outlets Reacquired From Franchisees | Outlets Closed | Outlets Sold to Franchisees | Outlets at End of the Year |
| NY | 2004 | 1 | 0 | 1 | 0 | 0 | 2 |
| 2005 | 2 | 2 | 0 | 1 | 0 | 3 | |
| 2006 | 3 | 0 | 0 | 3 | 0 | 0 | |
| OR | 2004 | 4 | 0 | 1 | 0 | 0 | 5 |
| 2005 | 5 | 0 | 0 | 2 | 0 | 3 | |
| 2006 | 3 | 0 | 0 | 0 | 1 | 2 | |
| Totals | 2004 | 5 | 0 | 2 | 0 | 0 | 7 |
| 2005 | 7 | 2 | 0 | 3 | 0 | 6 | |
| 2006 | 6 | 0 | 0 | 3 | 1 | 2 | |
| Appendix F: Sample Item 20(5) Table - Projected New Franchised Outlets Projected New Franchised Outlets As of December 31, 2006 | |||
| Column 1 | Column 2 | Column 3 | Column 4 |
| State | Franchise Agreements Signed But Outlet Not Opened | Projected New Franchised Outlet in the Next Fiscal Year | Projected New Company-Owned Outlets in the Next Fiscal Year |
| CO | 2 | 3 | 1 |
| NM | 0 | 4 | 2 |
| Total | 2 | 7 | 3 |
1Franchisors may include a summary opinion of counsel concerning any action if counsel consent to use the summary opinion and the full opinion is attached to the disclosure document.
2If a settlement agreement must be disclosed in this item, all material settlement terms must be disclosed, whether or not the agreement is confidential. However, franchisors need not disclose the terms of confidential settlements entered into before commencing franchise sales.
3If fees may increase, disclose the formula that determines the increase or the maximum amount of the increase. For example, a percentage of gross sales is acceptable if the franchisor defines the term "gross sales."
4Franchisors may include the reason for the requirement. Franchisors need not disclose in this item the purchase or lease of goods or services provided as part of the franchise without a separate charge (such as initial training, if the cost is included in the franchise fee). Describe such fees in Item 5. Do not disclose fees already described in Item 6.
5Take figures from the franchisor's most recent annual audited financial statement required in Item 21. If the entity deriving the income is an affiliate, disclose the sources of information used in computing revenues.
6Indirect offers of financing include a written arrangement between a franchisor or its affiliate and a lender, for the lender to offer financing to a franchisee; an arrangement in which a franchisor or its affiliate receives a benefit from a lender in exchange for financing a franchise purchase; and a franchisor's guarantee of a note, lease, or other obligation of the franchisee.
7Include sample copies of the financing documents as an exhibit to Item 22. Cite the section and name of the document containing the financing terms and conditions.
8The franchisor may include an attorney's opinion relative to the merits of litigation or of an action if the attorney issuing the opinion consents to its use. The text of the disclosure may include a summary of the opinion if the full opinion is attached and the attorney issuing the opinion consents to the use of the summary.
9If counsel consents, the franchisor may include a counsel's opinion or a summary of the opinion if the full opinion is attached.
10Franchisors may substitute alternative contact information at the request of the former franchisee, such as a home address, post office address, or a personal or business email address.
Statutory Authority
§§ 12.1-13 and 13.1-572 of the Code of Virginia.
Disclaimer: These regulations may not be the most recent version. Virginia may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
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