Franchise Disclosure Documents | The Ultimate Guide to FDDs

Field Guide

Home > Field Guide > 2. What is an FDD?

FDD stands for “Franchise Disclosure Document”. The purpose of this document, which is required under federal law, is to give buyers of a franchise information to help them make a decision in a uniform format. The uniform format of 23 Items theoretically allows buyers to compare one system to another. The FDD however is not the contract between the franchisor and the franchisee, although it does have a copy of the contract (the Franchise Agreement) as one of its exhibits.

An analogy is the multiple disclosures that public companies have to make to give their shareholders inside information that unless required by law to disclose they would not otherwise get. As a franchisor, you are a semi-public company and viewed that way under federal and many state laws. The law requiring you to prepare an FDD is to help level the information playing field so that anyone signing a franchise agreement can make an informed decision. You can’t legally sell a franchise (signing a contract or collecting money) unless you have a valid FDD and give (disclose) it to a prospective franchisee in advance.

Before we get into the specifics on the various sections of the FDD, let’s start with what a franchise is. In its simplest form, a franchise is a license agreement for the use of your intellectual property. When someone purchases a franchise, they’re not actually buying a business; they are starting their own business whose foundation is renting your intellectual property. As a franchisor, you will teach someone how to use your brand and share your previous successes and failures. They will also be joining a network of peers that are in the same business. As the brand leader, your role is to create a successful ecosystem around your brand and business practices.

Franchisees don’t own the brand. They are licensed to use the brand and operating system for a period of x-number of years. As the owner of the brand, it is your role to ensure they operate it in such a way that it enhances the overall system. The contract you will sign with them, the Franchise Agreement, gives you that legal authority to enforce your brand standards and gives them the right to use your brand. The FDD is the document you must give them before they sign the Franchise Agreement and commit to being a franchisee.

In Item 1 of the FDD, you must disclose all parents, predecessors, and affiliates that will provide goods or services to your franchisees. You must also describe the franchise business offered, the franchisor’s prior experience in this business, and any industry-specific regulations that impact this business.

A parent is an entity that controls the franchisor, either directly or indirectly. This control is usually in the form of ownership. An entity that owns more than 50% of the franchisor entity is a parent.
A predecessor is an entity or individual that previously owned the franchise system. You are required to disclose all predecessors of the franchise system within the ten-year period before the Issuance Date of your FDD.
An affiliate is an entity that provides products or services to the franchisee and is under common control with the franchisor. If an entity has the same parent, the same owners or the same directors as the franchisor entity, this entity would be under common control and would be an affiliate. Often, the owners of a franchise system will form a holding company, and the holding company will form two subsidiaries – a franchisor entity and an IP entity. In the FDD, the franchisor entity will disclose information about the holding company, which is the parent, and information about the IP entity, which is the affiliate that provides goods and services (the trademarks) to franchisees. Other affiliates that may need to be disclosed in the FDD are entities under common control with the franchisor that sell inventory or other goods to franchisees or provide services to franchisees (such as design, construction, or marketing services). Affiliate entities that operate the franchisor’s corporate outlets do not need to be disclosed until these outlets serve as a franchisee training center.

You need to disclose in Item 1 any industry-specific licensing or regulations that your franchisee needs to be aware of to operate a business using your brand and system. The more complex and locally regulated the business is, the more robust this section will be. This is where we need your help, as you are the expert on your business and what hoops a franchisee might need to jump through to operate. Examples of industry-specific disclosures are: licensing requirements for teachers, healthcare professionals, or estheticians; serve-safe certificates for food handlers; sports coach certifications; sound-proofing requirements for certain premises; and procedures for hazardous waste storage and disposal. You need to tell us the specific requirements that apply to your concept, so we can put it in a form that is easy for your prospective franchisees to understand. Although it will ultimately be the franchisee’s responsibility to comply with industry-specific licensing and regulations, your goal in the FDD is to let them know in general terms what that may look like.

Throughout this guide, we will present sample sections from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.

Sample Item 1

ITEM 1: THE FRANCHISOR, PARENTS, PREDECESSORS, AND AFFILIATES

To simplify the language, this disclosure document uses “we” or “us” to mean Belmont Mufflers, Inc., the franchisor. “You” means the individual, corporation, or other entity that buys a Belmont Muffler franchise.

Franchisor, Parent, and Affiliates

We conduct business under the name Belmont Muffler Shops. Our principal business address is 111 First Street, Jackson, Minnesota 55000. We are a Minnesota corporation that was incorporated on September 3, 1983. We do not conduct business under any other name.

Our corporate parent is CTF International, Inc. Its principal business address is 100 Main Street, Chicago, Illinois 77000.

Our affiliate is Belmont Muffler Manufacturers, Inc. Its principal business address is 222 Second Street, Jackson, Minnesota 55000. Belmont Muffler Manufacturers produces and supplies mufflers and related parts to Belmont and other muffler shops.

Agent for Service of Process

Our agent for service of process is Mr. John Smith. His principal business address is 185 Westfield Avenue, St. Paul, Minnesota 55111.

Prior Experience

We started operating muffler businesses in 1983. We started to sell Belmont Muffler Shops franchises in 1993. We currently own and operate 12 Belmont Muffler Shops. Each of these shops is located in urban areas, has approximately 8,000 square feet of floor space, and is located on a busy street. We also sell pipe bending machines, mufflers, and related automotive parts to various muffler shops.

Since 1983, Belmont Muffler Manufacturers, Inc., has been providing mufflers and related parts to muffler shops, including Belmont Muffler Shops franchises. It does not offer or sell franchises in any line of business.

From 1993 to 2003, we also offered franchises for “Repair-All Transmission Shops.” “Repair-All” franchises repaired and replaced motor vehicle transmissions under a marketing plan similar to the franchise offered in this document. Belmont sold 40 of these franchises, primarily in Minnesota, Michigan, Wisconsin, and Illinois. In 2003, Belmont sold this transmission repair company to CTF International, Inc., which no longer offers new “Repair-All” franchises for sale.

The Business We Offer

Your muffler shop franchise will sell and install mufflers, and related automotive parts and service to the general public. You must honor our guarantee to replace mufflers or exhaust pipes that wear out if the vehicle ownership has not changed. Our franchisees often operate their muffler shop franchise with their service stations or tire center. The market for muffler repair is fully developed. Your competitors include department store service departments, service stations, and other national chains of muffler shops.

Applicable Regulations

You must comply with federal, state, and local health and environmental safety regulations concerning the proper handling and disposal of oils, lubricants, cleaning fluids, and other products used in the business. You should investigate the application of these laws further.

This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.

Item 2 of the FDD must disclose a 5-year work history for each of the franchisor’s general partners, directors, officers, and other individuals who have management responsibility relating to the sale or operation of franchises. Management Responsibility means that an individual can exercise discretion in decision-making, without having to first seek approval from a supervisor. For each position, we must include all of the following, and nothing more:

Name of Employer
Job Title
Start Date and End Date of Employment (month and year)
Location of Employment (city and state)

This content should be very straightforward with no flowery language, awards, or volunteer work. There are other places to puff up your management team, but the FDD is not the best place to do it, so keep it simple.

Good Example:

Batman has been a Team Member of the Justice League in Metropolis since April of 2017. Prior to that, he was an Independent Contractor for Wayne Enterprises in Gotham, New Jersey from September 2005 to April 2017.

Poor Example:

As a Team Member of the Justice League, Batman increased brand awareness by 32% and successfully reduced training deaths by 15%. In his spare time, he has developed a variety of martial arts techniques.

Sample Item 2

ITEM 2: BUSINESS EXPERIENCE

President and Director: Jane J. Doe

Ms. Doe became President of Belmont Mufflers, Inc., in June 2006. From May 2004 until June 2006, she served as our Vice President. From June 2000 until April 2004, Ms. Doe was Vice President of Atlas, Inc., a Houston, Texas, manufacturer of automobile wheels.

Vice President: Henry Moore

On July 1, 2006, Mr. Moore joined Belmont as Vice President. From January 2000 until July 2006, Mr. Moore served as a manager of Belmont Muffler Manufacturers, Inc.

Franchise Coordinator: Phillip E. Smith

On January 1, 2006, Mr. Smith joined us as a franchise coordinator. From July 2001, until September 2005, Mr. Smith was a manager at Bishop Wash, Inc., a Denver, Colorado, manufacturer and distributor of car wash detergents.

Manager of Franchise Development: Ann Howard

Ms. Howard has managed franchise development at our parent company – CFT International, Inc., since 1995. She oversees the development of all franchise systems owned and operated by CFT International, including Belmont Mufflers, Inc.

Best Practices

If a franchisor hires a broker or an outside franchise sales organization (OFAO) directly, and that broker/OFSO uses the franchisor’s email address, they can be construed as a franchise salesperson for the franchisor, and they should be included in Item 2. If a franchisor is working with a broker group and those brokers are only referring prospects, they do not need to be included in Item 2.

Topics in the following two sections may be uncomfortable to discuss. But it is far better to disclose something on your terms, and tell your side of the story, versus not being transparent and having it come back later that you not only had the issue, but you withheld it from prospective franchisees. The coverup is worse than the crime.

In this section of the FDD, for the franchisor, predecessor, parent, any affiliate that either financially backs the franchisor or offers franchises using the franchisor’s trademarks, or anyone disclosed in Item 2, you need to disclose the following litigation:

Any action pending against the entity or individual that is administrative, criminal, or a material civil action that alleges some kind of violation of franchise law, securities law, fraud, or unfair or deceptive trade practices.
Any civil actions pending against the entity or individual, other than routine business litigation incidental to business operations, that are material because of the number of franchisees involved and the size, nature and financial condition of the franchise system. Examples of lawsuits incidental to business operations are car accidents, slip and falls, and landlord-tenant disputes, and these need not be disclosed.
Any civil action during the last fiscal year in which the entity or individual was a party and which involved a franchise relationship. The purpose of this particular disclosure is to show how litigious the franchisor is. If an action is resolved during the last fiscal year, you need to disclose it. If it was resolved the previous fiscal year, you don’t necessarily need to disclose it.
Any conviction or nolo contendere plea to a felony charge, or any civil action alleging violation of franchise law, securities, antitrust or deceptive trade practices in which the entity or individual was held liable, within the preceding 10 years. Held liable means that the entity or individual either had to pay money, give up rights (such as forgo a non-compete) or take an action against his, her or its interest. The exception to the 10-year look back is New York, where a felony has no time limit, so a 20-year-old felony conviction would need to be disclosed.
Any action by a public agency relating to franchise, securities, antitrust or unfair or deceptive trade practices that resulted in a currently effective injunctive order or restrictive decree against the entity or individual.

If your eyes glazed over reading the above, you are not alone. That is why you hired us to exercise our judgment into what needs to be disclosed and what doesn’t. If anyone mentioned in Item 2 or any entities associated with the franchisor has been a party to any litigation in the last ten years, just let us know, and we will talk through whether or not it needs to be disclosed.

For the required disclosures of litigation, we need the case number, parties, a brief description of the underlying circumstances, and the current status or how it was resolved. Even if there was a settlement and the settlement says that it’s confidential, it still needs to be disclosed according to the guidelines. That is why you have a franchise law firm helping you prepare your FDD, for us to walk you through this part of the disclosure. And remember, we are your lawyers and bound by attorney-client privilege/onfidentiality. So, like the privilege you have with your doctor, you can feel free to tell us anything related to an ugly event in your past that we will work through as your advocate.

Sample Item 3

ITEM 3: LITIGATION

Pending Actions

Blank v. Belmont Mufflers, Inc., No. 06-111 (M.D. Fla. filed August 1, 2007).

Five franchisees filed suit against us for breach of contract, alleging that we failed to furnish equipment in the time period stated in our franchise agreement. These franchisees seek damages of $350,000. A trial is scheduled for later in 2007.

Prior Actions

Doe v. Belmont Mufflers, Inc., No. 05-312 (IRT) (S.D.N.Y. filed March 1, 2005).

Our franchisee, Donald Doe, sought to enjoin us from terminating him for nonpayment of royalty fees. On April 3, 2006, Doe withdrew the case when we repurchased his franchise for $90,000 and agreed not to enforce non-compete clauses against him.

Governmental Actions

Indiana v. Belmont Mufflers, Inc., No. 05-123 (S.D. Ind. filed April 1, 2005).

The Attorney General of Indiana sought to enjoin us, our president Jane Doe, and franchise coordinator Phillip E. Smith, from offering unregistered franchises and using false income representations. The court found that we had offered franchises, that the offers were not registered, and that we had made the alleged false representations. The court enjoined us from repeating those acts.

FTC v. CFT, International Inc., No. 03-222 (D. Minn. filed March 1, 2003).

The Federal Trade Commission filed suit against our parent CFT International, Inc., that guarantees delivery of pipe and equipment to our franchisees. The Commission alleged that CFT violated the Commission’s Mail or Telephone Order Merchandise Rule. The Commission obtained an injunction and a civil penalty of $20,000.

Litigation Against Franchisees in the Last Fiscal Year

During fiscal year 2007, Belmont Mufflers initiated seven lawsuits against franchisees as follows:

Suits to Collect Royalty Payments

Belmont Mufflers vs. Smith, No. 457-123 (E.D. La. 2007) Belmont Mufflers vs. Jones, No. 07-890 (S.D. Fla. 2007) Belmont Mufflers vs. Taylor, No. 07-123 (D. Nev. 2007)

Suits to Enforce System Standards

Belmont Mufflers vs. Stevenson, No. 28-098 (C.D. Cal. 2007)

Belmont Mufflers vs. Rogers, No. 2244 (D. R.I. 2007)

Suits to Enforce Covenant-Not-To-Compete

Belmont Mufflers vs. Baker, No. 07-123 (S.D. Fla. 2007)

Belmont Mufflers vs. Harris, No. 072244 (D. Nev. 2007)

Other than these actions, no litigation is required to be disclosed in this disclosure document.

If the franchise, parent, predecessor, or affiliate, or anyone listed Item 2 has had a bankruptcy in the last 10 years, including personal bankruptcies, you will need to provide the case number, the Court in which the bankruptcy case was filed, the status, and a short blurb of explanation. In addition to it being a legal obligation to disclose all bankruptcies, our opinion is that transparency is always better, so you don’t cede the moral high ground in a future dispute. For example, if you got divorced five years ago and went bankrupt but don’t disclose it, later a franchisee could fail and then claim, “I have this problem with people who go bankrupt, and if I knew he went bankrupt, I never would have signed the franchise agreement.” You can’t prove the statement is true, but you’ve put yourself in a challenging situation. If you are ever unsure if something should be disclosed, discuss this with your Spadea Lignana legal team.

Sample Item 4

ITEM 4: BANKRUPTCY

On March 2, 2004, Belmont filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the District of Minnesota, 04-BR-3344. We continued to operate our business and manage our assets as a debtor-in-possession under bankruptcy court supervision. On October 2, 2005, the bankruptcy court confirmed our plan of reorganization, which restructured the rights of creditors by providing for certain payments and discharged their claims.

On March 1, 2007, Belmont Muffler Manufacturers, Inc., our affiliate, filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the District of Minnesota, 06-BR-4455.

Belmont’s president, Jane Doe, was president of Atlas, Inc., a Houston, Texas, manufacturer of automobile wheels from June 2000 until March 2002. On June 6, 2002, creditors filed an involuntary petition against Atlas for liquidation under Chapter 7 of the U.S. Bankruptcy Code. In re Atlas, Inc., No. 04-BR-555 (S.D. Tex. 2002). On July 14, 2002, the bankruptcy court entered an order for relief against Atlas. A trustee was appointed; she closed Atlas’ operations, sold its assets, and distributed the proceeds to creditors in accordance with the priorities of the Bankruptcy Code.

Belmont manager of franchise operations, Philip E. Smith, filed a bankruptcy petition under the liquidation provisions of Chapter 7 of the U.S. Bankruptcy Code on September 7, 1999, after obtaining employment with Belmont on January 1, 1998. In re Smith, No. 06-BR-6789 (D. Minn. 1999). On January 10, 2000, the bankruptcy court entered a discharge.

Item 5 contains the initial franchise fee and any other fees a franchisee must pay the franchisor or affiliate before opening the franchised outlet. Other fees may include items like equipment, software, marketing materials, pre-opening inventory or vehicle wrap. Only goods and services purchased from the franchisor or an affiliate before opening belong in Item 5. If these items are purchased from a third-party supplier, we don’t include those expenditures here.

Keep in mind that the total of the initial fees is referenced on the cover page. A franchisor will usually get the question each year about why a franchisee’s range of initial fees paid to the franchisor is so high. You have to remember to explain to your prospective franchisees that it is more than just an initial franchise fee, it is all fees paid to the franchisor or an affiliate, and these fees will all be listed in this section.

Discounts for Candidates

Franchisors can choose to offer discounted franchise fees to qualified candidates. Many offer discounts to U.S. Veterans, first responders, first “x” amount of franchisees, etc. If you are going to offer discounts, first you should organize what requirements must be met to be eligible to receive them and what the percentage or dollar amount they will be discounted. If a franchise candidate is applicable for a discount you will need to note this within an addendum for their agreement.

If you are considering offering discounts to honorably discharged U.S. veterans, you can learn more about marketing this through VetFran, if interested.

Tips

Not sure how much to charge for your franchise fee… converse with your consultant or reach out to your Spadea Lignana team for further assistance. You are also encouraged to research your competitors too.

Sample Item 5-1

ITEM 5: INITIAL FEES

All Belmont Muffler Shops franchisees pay a $42,000 lump sum franchise fee when they sign the franchise agreement. Belmont will refund the entire amount to you if we do not approve your application within 45 days. Belmont will refund $9,000 of this fee if you do not satisfactorily complete your two-week training. No refunds are available under any other circumstances.

Sample Item 5-2

ITEM 5: INITIAL FEES

You must pay a franchise license fee of $1,000 per thousand licensed drivers who reside within your exclusive area when the franchise agreement is signed. The number of licensed drivers is determined by the latest abstract of the state agency which issues driver’s licenses. The minimum fee is $20,000. When you send your application, you must pay a non-refundable $500 application fee. You must pay an additional $5,000 when you receive your equipment. The balance of your fee is payable in 12 equal monthly installments of $1250 in the case of the minimum fee. The first installment payment is due 1 year after your shop opens. Belmont charges 10% interest, on an annual basis, on the unpaid balance. Interest compounds daily and accrues from the date that you receive your equipment. All buyers pay this uniform fee and receive the same financing terms on the fee. If your application is not accepted, Belmont retains the $500 for investigative costs, but you are not liable for the remainder of the initial fee. Belmont does not give refunds under any other circumstances.

Item 6 is a Table of all other fees imposed and collected by the franchisor throughout the life of the franchise agreement. This includes any niche charges, late fees, indemnification, etc. In some instances where the fee can be variable, you will want to list both an upper and lower limit.

We encourage you to be thoughtful and intentional when laying out these fees. Once your brand starts to expand nationally, these fees will be scrutinized by state examiners who regularly push back on open-ended fees. Open-ended fees are also subject to push back from attorneys hired by your prospective franchisees. It is better, when constructing this table, to be as clear and unambiguous as possible.

Sample Item 6

ITEM 6: OTHER FEES

Type of Fee	Amount	Due Date	Remarks
Royalty (note 1)	4% of total gross sales	Payable monthly on the 10th day of the next month	Gross sales include all revenue from the franchise location. Gross sales do not include sales tax or use tax.
Advertising (note 1)	2% of total gross sales.	Same as royalty fee
Cooperative Advertising (note 1)	Maximum – 2% of total gross sales	Established by franchisees	Franchisee may form an advertising cooperative and establish local advertising fees. Company-owned stores have no vote in these cooperatives.
Additional Training (note 1)	$1,000 per person	Two weeks prior to beginning of training	Belmont trains two persons free. See Item 11.
Additional Assistance (note 1)	$500 per day	Thirty days after billing.	Belmont provides opening assistance free. See Item 11.
Transfer (note 1)	$1,000	Before the transfer.	Payable when you sell your franchise. No charge if franchise transferred to a corporation that you control.
Audit (note 1)	Cost of audit plus 10% interest on underpayment (note 2).	Thirty days after billing.	Payable only if audit shows an understatement of at least 2% of gross sales for any month.
Renewal Fee (note 1)	$1,000	Thirty days before renewal.

Note 1: All fees are imposed by and are paid to Belmont. All fees are non-refundable.

Note 2: Interest begins from the date of the underpayment.

Item 7 is a Table of the franchisee’s estimated initial investment. The Table lists the expenses that a franchisee is expected to incur prior to opening the franchised outlet and for the initial first months of operation. You must provide an estimate of each expense and explain the factors you relied on in calculating the amounts. These factors could be your own experience in opening corporate outlets, your franchisees’ experience, or estimates received from industry professionals. Franchisors often want to show the lowest amounts possible in Item 7, but this tendency works against them. If franchisees are consistently spending way more than the estimated range in Item 7, they may not have sufficient capital to open their business strong, and in extreme cases, may have a claim against you for misrepresentation.

Franchisors win when they have long-term successful units. Just because you started your business on a shoestring budget doesn’t mean the franchisee should. Franchisees want success in the shortest time frame possible with the least risk. That is why they buy a franchise. If you know that spending $10,000 in grand opening advertising is the way to jump-start the business, then put that in your FDD. If a $30,000 piece of equipment is necessary, put it in your Item 7 without apology. The franchisee who chooses a system based on the low end of an Item 7 investment range is the least likely to be successful.

The old saying that “it takes money to make money”, is another reason why franchise units outperform unbranded startups. Through experience, trial and error, and by measuring results year after year, you as a franchisor should know, or at least be in the best position to estimate, what it costs to launch a unit properly. That doesn’t mean you still don’t look for the most effective solution; it just means that you disclose to your prospects what you think it will take for them to win.

Buying a franchise is an investment. If you approach the process as if you are in a bidding war, so will your prospects. Going into business is a huge decision for a franchisee, and a few thousand dollars in either direction is not going to make the difference for the right candidate. In fact, the risk is all in understating what it really takes. The only risk in overstating the low end is losing some candidates that might not have been a good fit in the first place. If you understate the investment, those who move forward may be undercapitalized and fail. Even those that don’t fail may not spend what is necessary to come out of the gate strong, which hurts the average unit economics, validation, and increases the risk of litigation. When it comes to Item 7, keep the low-end up!

Best Practices

Ranges from low to high costs should be used to help represent the different prices depending on a variety of factors; i.e. location, demographics, etc. Franchisors have the tendency to low-ball their high ranges, they think it will make them more “attractive” to candidates and sales consultants, but a low high-end range can come off as misleading to new signing franchisees that their individual costs are higher than the high-end range presented in the FDD. Adding in a buffer or cushion amount within the range will protect you and the franchisee from situations like inflation and location dependent cost differences. Franchisees will not be mad if they do not spend the high-end dollar amount.
Learn more by reading:
- “Getting Item 7 Right: Keep the Low End Up!” by Tom Spadea, featured in Franchise Dictionary Magazine.
- “Go Big or Go Home” by Tom Spadea, featured in Franchise Dictionary Magazine

Sample Item 7

ITEM 7: YOUR ESTIMATED INITIAL INVESTMENT

Type of expenditure	Amount	Method of payment	When due	To whom payment is to be made
Initial franchise fee	$15,000 (note 1)	Lump sum	At signing of franchise agreement	Belmont Mufflers, Inc.
Travel and living expenses while training	$2,500 to $5,000	As incurred	During training	Airlines, hotels, and restaurants
Real estate and improvements	(Note 2)	(Note 2)	(Note 2)	(Note 2)
Equipment	$40,000 (note 3)	Lump sum	Prior to opening	Belmont or vendors
Signs	$2,200	Lump sum	Prior to opening	Abbey Sign Company
Miscellaneous opening costs	$8,000 (note 4)	As incurred	As incurred	Suppliers, utilities, etc.
Opening inventory	$8,800 (note 5)	Lump sum	Prior to opening	Belmont or vendors
Advertising fee – 3 months	$500	As incurred (% of gross sales)	Monthly	Belmont
Additional funds – 3 months (note 6)	$23,000 to $45,000	As incurred	As incurred	Employees, suppliers, utilities
TOTAL (note 7)	$100,000 to $124,500 (note 8) (Does not include real estate costs)

Notes:

(1) See Item 5 for the conditions when this fee is partly refundable. W e do not finance any fee.

(2) If you do not own adequate shop space, you must lease the land and building from us. Typical locations are light industrial and commercial areas. The typical Belmont Mufflers Shop has 8,000 square feet. Former three-or-four-bay gasoline service stations have been converted into a Belmont Mufflers Shop. Rent is estimated to be between $52,000 – $120,000 per year depending on factors such as size, condition, and location of the leased premises.

(3) This payment is fully refundable before equipment installation. After installation, we deduct $3,000 installation costs from your refund.

(4) This includes security deposits, utility costs, and incorporation fees.

(5) This payment is fully refundable before we deliver your inventory. After delivery, we will deduct a 10% restocking fee from your refund.

(6) This estimates your start-up expenses. These expenses include payroll costs. These figures are estimates and we cannot guarantee that you will not have additional expenses starting the business. Your costs will depend on factors such as: how much you follow our methods and procedures; your management skill, experience and business acumen; local economic conditions; the local market for our product; the prevailing wage rate; competition; and the sales level reached during the initial period.

(7) Except as indicated, we do not offer direct or indirect financing to franchisees for any items.

(8) We have relied on our 24-years of experience in the muffler business to compile these estimates. You should review these figures carefully with a business advisor before making any decision to purchase the franchise.

Item 8 describes the limitations that a franchisor places on its franchisees with regard to the furniture, fixtures, equipment, supplies, inventory, computer systems, and any other goods and services that the franchisee will need to lease or purchase to open and operate the franchised business. If you require the franchisee to lease or purchase items that meet particular specifications, or if you require the franchisee to lease or purchase items from only certain suppliers, this information must be disclosed in Item 8. In Item 8, you will need to disclose:

Any item where the franchisee must abide by standard specifications that the franchisor requires. Many franchisors require their franchisees to lease or purchase items that meet certain specifications. Common examples are computer hardware and software and the types and coverage minimums of insurance policies.
Any item where the franchisee must use a designated supplier. For example, Joe’s Place may require franchisees purchase their French fries from a particular potato supplier. This restricts the franchisee from shopping around to maybe get a better price elsewhere. Importantly, you must disclose whether the franchisor itself or one of its affiliates is a designated supplier, or the only approved supplier, of any required good or service. You must also disclose whether any of your officers owns an interest in any designated supplier.
Any situation where there may be a financial gain for the franchisor from purchases made by the franchisee. If the franchisor, or one of its affiliates, receives any revenues from leases or purchases by franchisees, it must be listed in Item 8. If the franchisor or one of its affiliates is the only approved supplier for a certain good or service, then the total amount of annual revenue received will be included here. If any supplier will make payments, or provide other material benefits, to the franchisor based on franchisees’ purchases, that needs to be explained here, too. For example, if a supplier will pay a rebate to the franchisor, we need to state how that rebate is calculated (whether it is a flat amount, such as $1/case of syrup, or a percentage, such as 2% of franchisee’s invoice price). Also, if a supplier gives the franchisor a break on the costs of certain items for corporate-owned outlets, that also needs to be disclosed. So, if a designated supplier charges your franchisees $5/case of product but only charges you $3/case of product, you need to disclose this.

You also need to disclose in Item 8 the percentage of overall required purchases that are restricted by your specifications or required suppliers. This information lets prospects know their freedom to shop around for better prices or for items of their own personal preference.

Best Practices

We encourage you to stay away from product markups as it is an irritant to franchisees. For example, rather than charging an extra $2 a case for an item the franchisee can get at a local supplier, go to that supplier and suggest that rather than pay you $2 a case—in which you estimate you’re going to sell 10,000 cases to your franchisees next year, have the supplier give you a $20,000 sponsorship to support your annual meeting. It’s the same dollars, but now it’s viewed as a loyal supplier supporting the education and betterment of the franchisees instead of a kickback.

Be greedy long-term. You’re in this business, not for $2 for a case, but to sell the system for $20 to $30 million. And you get there by having happy franchisees that feel you are on their side. Your franchisees need to make money. It might sound obvious and straightforward, but it is the single most crucial factor in your long-term success. If all you’re doing is milking your franchisees, you’re not going to build long-term sustainable value.

Sample Item 8

ITEM 8: RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES

Required purchases

You must purchase your pipe bending machine, hoist, cutting torch, mufflers, exhaust pipe, and other supplies under specifications in the operations manual. These specifications include standards for delivery, performance, design, and appearance. Our specifications are formulated by our engineering department and may be modified periodically, in consultation with the Belmont Franchisee Advisory Council.

Required and approved suppliers

You must purchase required equipment from Belmont or an approved supplier. Belmont’s affiliate, Belmont Muffler Manufacturers, Inc., is an approved supplier of mufflers. Our President, Jane Doe, owns an interest in Belmont Muffler Manufacturers, Inc. We have also approved three other suppliers of mufflers and exhaust pipe, as listed in our operations manual.

Approval of alternative suppliers

Belmont may approve other suppliers of mufflers and exhaust pipe who meet the specifications set forth in the operations manual. If you would like to purchase these items from another supplier, you must request our “Supplier Approval Criteria and Request Form.” Based on the information and samples you supply to us and your payment of a $500 fee, we will test the items supplied and review the proposed supplier’s financial records, business reputation, delivery performance, credit rating, and other information. Our review typically is completed in 30 days. Approval of alternative suppliers may be revoked if our engineering department determines that their mufflers and exhaust pipe fail to satisfy the specifications set forth in the operations manual, as it may periodically be updated.

Revenue from franchisee purchases

In the year ending December 31, 2007, Belmont’s revenues from the sale of equipment to franchisees was $500,000, or 5% of Belmont’s total revenues of $10,000,000. The cost of equipment and supplies purchased in accordance with our specifications will represent 50-60% of your total purchases in establishing the business and 20-30% of your total purchases during operation of the business.

In the year ending December 31, 2007, Belmont Muffler Manufacturer’s Inc.’s revenues from the sale of mufflers to franchisees was $2,000,000. The purchase of mufflers from Belmont Muffler Manufacturers will represent 10 to 15% of your overall purchases in establishing and operating the business. Belmont Muffler Manufacturers, Inc., pays us a .05% rebate on all mufflers purchased from franchisees.

One of the three approved suppliers of mufflers and exhaust pipe pays Belmont a rebate of 1% of all franchisee purchases.

Cooperatives

We do not have any purchasing or distribution cooperatives.

Negotiated prices

We negotiate purchase arrangements with Belmont Muffler Manufacturers, Inc., including the price terms.

Material benefits

We do not provide any material benefits to you if you buy from sources we approve.

Item 9 is a chart identifying the franchisee’s obligations. We will develop this section for you as it will cross-reference various areas in the FDD and Franchise Agreement. The purpose of this section is the comparing “apples to apples” goal of the disclosure rules. The Item 9 Chart acts as an index, which enables prospects to quickly locate in the FDD and Franchise Agreement certain franchisee obligations so that they can compare multiple systems to see if they have different requirements. The good news for you is it is one of the sections that will not require any effort from you!

If you are willing to finance any part of the initial fees for your franchisees, Item 10 is where we disclose that information. Many franchisors choose not to provide financing to their franchisees. However, if you intend to do so, we need to disclose the specifics of this arrangement. This includes the amount you will finance, the payback period, the interest rate, whether you will have a security interest in the franchisee’s assets (we recommend you do), who must personally guarantee the loan, and the consequences of default.

You may see in some FDDs, especially older FDDs, information related to SBA Guaranteed loans. Based on feedback and requirements from State Examiners, we don’t believe it is proper to disclose information related to SBA loans in your FDD.

Sample Item 10

ITEM 10: SUMMARY OF FINANCING OFFERED

Item Financed	Source of Financing	Down Payment	Amount Financed	Term (Years)	Interest Rate	Monthly Payment	Prepay Penalty	Security Required	Liability Upon Default	Loss of Legal Right on Default
Initial Fee	Belmont (note 1)		$10,000	10	18%	$180	None	Personal Guarantee	Loss of franchise-unpaid loan	Waive notice. Confess judgment
Land/ Constr			None
Leased Space	Belmont (note 2)	$2,000 (security deposit)		7-10	N/A	$3,000-$6,000	None	Personal Guarantee	Loss of franchise; back rent plus 2 months; franchise rights, collection costs incl. attorneys fees	None
Equip. Lease	USA Credit Corp. (note 3)	None	$5,000	5	15%	$100	None	Personal Guarantee	Equip. removed; past due payments; $1000 liquid damages; costs of collection	Lose all defenses
Equip. Purchase	Belmont (note 4)	$1,250 (25%)	$3,750	2-7	15%	$72-$182	$500	Personal Guarantee	Loss of franchise, equip. removal; overdue payments; collection costs, incl. attorneys fees	None
Opening Inventory		None
Other Financing		None

Notes:

(1) If you meet Belmont’s credit standards, Belmont will finance the $10,000 initial franchise fee over a 10-year period at an interest rate (rate of interest, plus finance charges, expressed on an annual basis) of 18%, using the standard form note in Exhibit E. The only security we require is a personal guarantee of the note by you and your spouse, or by all the shareholders of your corporation. (Loan Agreement, Section) The note can be prepaid without penalty at any time during its 10-year term. (Loan Agreement, Section A.) If you do not pay on time, we can call the loan and demand immediate payment of the full outstanding balance and obtain court costs and attorney’s fees if a collection action is necessary. (Loan Agreement, Section B.) We also have the right to terminate your franchise if you do not make your payments on time more than three times during the note term. (Loan Agreement, Section C.) You waive your rights to notice of a collection action and to assert any defenses to collection against Belmont. (Loan Agreement, Section D1.) Belmont discounts and sells these notes to a third party who may be immune under the law to any defenses to payment you have against us. (Loan Agreement, Section D2.)

(2) In most cases, Belmont will sublease the franchised premises to you, but will guarantee your lease with a third party if you have acceptable credit and that is the only way to obtain a location. (Lease Section B.) The precise terms of Belmont’s standard lease in Exhibit B will vary depending on the size and location of the premises, but the chart reflects a typical range of payments for Belmont’s standard 6 bay franchise outlet, including payment of one month’s rent as a security deposit. (Lease Section C.)

The only other security we require is a personal guarantee of the lease by you and your spouse, or by all the shareholders of your corporation. (Lease Section D1.) The lease can be prepaid without penalty at any time during its term. (Lease Section D2.) If you do not make a rent payment on time, we have the right to collect the unpaid rent plus an additional two months’ rent, as liquidated damages. (Lease Section E.) Belmont can also obtain court costs and attorney’s fees if a collection agency is necessary. (Lease Section F.) If you are late with your rent more than three times during the lease term, we have the right to terminate the lease, take over the premises, and terminate your franchise. If Belmont guarantees your lease, we will require you to sign the guarantee agreement in Exhibit F. (Lease Section G.) This gives us the same legal rights as the sublessee but requires you to give Belmont the right to approve your lease and pay the rent for you if you fail to pay on time. (Lease Section G.)

(3) If you want to lease the pipe bending machine and other equipment you need, Belmont has arranged an equipment lease (Exhibit C) from USA Credit Corporation of Las Vegas, Nevada. If you choose this option, you will pay $100 a month for 60 months (5 years) at an interest rate (rate of interest, plus finance charges, expressed on an annual basis) of 15% based on a cash price of $5,000, with no money down. (Equipment Lease, Section A.) At the end of the lease term, you may purchase the equipment with a one-time payment of $2,500. (Equipment Lease Section B.) USA Credit requires a personal guarantee from you and your spouse, or from all the shareholders of your corporation, and retains a security interest in the equipment. (Equipment Lease, Section C.) The equipment lease can be prepaid at any time. (Equipment Lease, Section D.) If you do not make a payment on time, USA Credit can demand payment of all past due payments, remove the equipment, and charge you $1,000 as liquidated damages. (Equipment Lease, Section E.) USA Credit can also cover its costs of collection, including court costs and attorney’s fees. (Equipment Lease, Section E.) W hile Belmont does not know USA Credit’s policies, USA Credit may discount and transfer the lease to a third party who may be immune under the law to claims or defenses you may have against USA Credit, the equipment manufacturer, or Belmont. We receive a referral free of $500 from USA Credit for every franchisee who leases equipment from it.

(4) If you prefer, Belmont will sell you the pipe bending machine and other necessary equipment on time. (Equipment Purchase Agreement, Section A.) We require a 25% down payment of $1,250. (Equipment Purchase Agreement, Section A.) We will finance the remainder over a 2–7-year period at your option at an interest rate of 15%. (Equipment Purchase Agreement, Section B.) Payments range from $228.11 a month over 7 years to $821.58 a month over 2 years. (Equipment Purchase Agreement, Section C.) Belmont’s standard equipment financing note in Exhibit D must be personally guaranteed by you and your spouse, or by all the shareholders of your corporation, and we will retain a security interest in the equipment. (Equipment Purchase Agreement, Section D.) You may purchase the equipment at any time during the lease period by paying the remainder of the principal plus a $500 prepayment penalty. (Equipment Purchase Agreement, Section E.) If you do not make a payment on time, we can demand all overdue payments, repossess the equipment, and terminate your franchise. We can also recover our costs of collection, including court costs and attorney’s fees. (Equipment Purchase Agreement, Section E.)

Except as disclosed in Note 1, Belmont does not offer financing that requires you to waive notice, confess judgment, or waive a defense against us or the lender, although you may lose your defenses against us and others in a collection action on a note that is sold or discounted, as disclosed in Notes 2 and 3.

Except as disclosed in Note 3, Belmont does not arrange financing from other sources.

Except as disclosed in Notes 1 and 3, commercial paper from franchisees has not been and is not sold or assigned to anyone, and we have no plans to do so.

Except as disclosed in Note 3, Belmont does not receive direct or indirect payments from placing financing.

Except as disclosed in Note 2, Belmont does not guarantee your obligations to third parties.

Section 1 of Item 11 lists the franchisor’s obligations and assistance given to the franchisee prior to the franchisee’s opening of the franchised outlet. We specifically need to state your assistance with:

Site Selection
Building out the franchisee’s premises
Hiring and training employees
Providing necessary equipment, signs, fixtures, inventory, and supplies.

We will draft this section of your Item 11 based on the franchisor’s pre-opening obligations contained in the franchise agreement.

This section will provide the expected amount of time it will take for a franchisee to open the franchised outlet following the date that he or she signs the franchise agreement.

Section 3 of Item 11 lists the franchisor’s post- opening obligations to the franchisee during the term of the franchise agreement. We specifically need to state your obligations regarding:

Managing Brand Funds
Setting Prices
Developing Products and Services that franchisees will offer to customers
Improving or developing the franchisee’s franchise business
Establishing administrative procedures, inventory controls, or accounting standards
Resolving operational problems

We will draft this section of your Item 11 based on the franchisor’s post-opening obligations contained in the franchise agreement.

When your system has about 20 franchisees, you may want to consider creating a franchisee council as a means to communicate ideas. If you do create a council, we recommend that you draft by-laws that will govern how it is operated. We also recommend that a franchisee council acts in an advisory capacity only, and that it does not have operational or decision-making power.

In this section of Item 11, we need to disclose (i) whether you have the power to form, change and dissolve a franchisee council and (ii) how members are selected.

For this section, you must disclose:

Whether the franchisor is obligated to conduct advertising
The media used for any advertising (e.g., print, radio, television, or Internet)
The source of the advertising
The geographical scope of the advertising (i.e., local, regional, or national)
Whether franchisees must contribute to an advertising fund or spend any specified amount on advertising in their local area

While the systemwide fund to which franchisees are required to make regular contributions is often referred to as an advertising fund, we encourage you to call it a brand fund instead. This is because “brand fund” is often less confusing and broader than “advertising fund”. The brand fund is not only advertising but anything involving brand awareness. This includes website development, sponsorships of certain events that use brand monies, public relations, and non-profit fundraising events. For most emerging franchise systems, the brand fund money “creates the creative” on behalf of all franchisees. Each franchisee is responsible for spending their local marketing dollars to push that creative out to the customers in their territory.

Financial Statement

Whether your franchisees have access to the financial statements of the brand fund or not, we recommend that you provide an unaudited statement to any franchisees that request them. This will force you to keep good records and a reminder not to do anything questionable with your brand fund expenditures. Even if you decide not to allow franchisees to see how the fund is spent, at some point, an unhappy franchisee could hire an attorney and force you to produce documentation of where you used the money. Lack of transparency is a sure way to stunt the growth of your system. Instead, get into the habit of being an open book and having the franchisees understand why you are making decisions, where you are spending the brand fund money, and how it will benefit them.

Each year when you update your FDD, you are required to disclose, by percentage, how the brand fund was spent in the previous fiscal year. You must disclose the percentage spent on production, the percentage spent on media placement, the percentage spent on administrative expenses, and the percentage spent on other use(s) and describe the other use(s).

Waive the Fee?

We hear from new franchisors a common question, “We’re not doing much, so can we just waive the fee for now?” Our advice is to always charge from the beginning. If you wait a few years, franchisees are going to push back and say, “Why should I start paying into the brand fund now? I don’t want to spend money, nor do I see the benefit.”

Remember the long-term value of building the $20 million enterprise. This is one of those areas that’s incredibly important, as it’s challenging to get franchisees who are used to not paying to start paying. If you parked for free for years, how would you feel when you finally had to pay for parking? Even if you knew you were obligated to at some point, human nature says you won’t be happy about it.

Best Practices

While you may think you don’t have any branding expenditures, in reality, you most likely do. Keep track of all the money spent on creating your brand from day one. This includes developing the logo, building the website, etc. All of this can and should be recouped. In fact, if franchisors really accounted for this, they could show deficit spending in the brand fund for the year, meaning they are going out of pocket to support the brand in the early years. This changes the narrative, from the franchisees not getting value to them getting more value than they are paying for. You should always be making the case of why being part of your system is good for the franchisees, and the brand fund is a great place to get into that habit on day one.

Pay careful attention; if you pay yourself or your employees for conducting advertising, the FDD must specifically state that you can use brand fund money for staff salaries related to advertising. This is an area that we can work on together. Let us know, as your franchise attorneys, what you are doing, where the money is going, and we can help give you the guardrails so you don’t create a problem for yourself down the road.

Regarding the computer systems, for our purposes of drafting your FDD, we need to know what it is and how it functions. For example, does it do inventory control, scheduling, customer appointment scheduling, reporting, etc.? Will you, the franchisor, have remote and independent access to the franchisee’s systems? If so, it must be included.

Best Practice

We recommend that you have access and full transparency into your franchisee’s business operation from day one. Part of your value proposition is being able to compare locations and create benchmarks. Having access to each location’s computer system will allow you to make comparisons. If you don’t create that culture from day one, it will be challenging to change later.

Here you will provide the table of contents and page counts of your operations manual as it looks on the day you issue your franchise agreement. Many operations manuals now are in electronic form, and web page counts are an acceptable form of disclosure.

Your manual will change as your franchise operation procedures change, but the FDD will only need to be updated once a year with the then-current table of contents.

In disclosing your training program, we encourage you to under-promise and over-deliver. Provide a conservative number of training hours in the training section to prevent any complaints that your training program wasn’t as comprehensive as you claimed it would be.

Item 11 is the section of the FDD where you highlight the experience of your training personnel. Unlike the Item 2 disclosure, which is limited to a summarized 5-year work history only, the Item 11 disclosure requires you to describe each franchise training instructor’s experience with the franchisor and experience with the subject matter the instructor teaches.

Best Practice

If you do not have a dedicated trainer for your new franchisees, you can state that your training program is provided under the guidance of you or one of your main team members. We often hear that a franchisor doesn’t know who’s doing their training when they create their FDD. By placing the president, CEO, or founder in this position, you can tout their experience and still have flexibility on who actually teaches the class.

Sample Item 11

ITEM 11: FRANCHISOR’S ASSISTANCE, ADVERTISING,COMPUTER SYSTEMS, AND TRAINING

Except as listed below, Belmont is not required to provide you with any assistance.

Pre-Opening Assistance

Before you open your business, Belmont will:

Designate your exclusive territory (Franchise Agreement, Paragraph 2).
Assist you in selecting a business site (Franchise Agreement, Paragraph 3). You select your business site within your exclusive area subject to our approval. Your site must be at least 8000 square feet, must have parking spaces, and must have an average of 250 cars per hour driving by. Although not required by the Franchise Agreement to do so, Belmont assists in site selection by telling you the number of new car registrations, population density, traffic patterns, and the proximity of the proposed site to other Belmont Muffler Shops. We must approve or disapprove your site within 20 days after we receive notice of the proposed location. (Franchise Agreement, Paragraph 6.)
Franchisees typically open their shops within four to seven months after they sign a franchise agreement. The factors that affect opening time are the ability to obtain a lease, financing, or building permits, zoning, and local ordinances. Other factors include weather conditions, shortages, and delays in installation of equipment, fixtures, and signs.
Within 30 days of your signing the Franchise Agreement, assist you in finding and negotiating the lease or purchase of a location for your muffler shop. (Franchise Agreement, Paragraph 4.) You will purchase or lease your store location from independent third parties.
Within 60 days of your signing the Franchise Agreement, provide written specifications for store construction or remodeling and for all required and replacement equipment, inventory, and supplies. (Franchise Agreement, Paragraph 4.) See Item 8 of this disclosure document.
Within 60 days of your signing the Franchise Agreement, provide blueprints for your store construction or remodeling and obtain health, sanitation, building, utility, and sign permits for your premises. You pay for the construction and remodeling. (Franchise Agreement, Paragraph 5.)

Post-Opening Assistance

During the operation of the franchised business, Belmont will:

Develop new products and methods and provide you with information about developments. (Franchise Agreement, Paragraph 8.)
Telephone you each week for the first 90 days after you open your shop to discuss your operational problems. (Franchise Agreement, Paragraph 9.)
Hold annual conferences to discuss sales techniques, personnel training, bookkeeping, accounting, inventory control, performance standards, advertising programs, and merchandising procedures. There is no conference fee, but you must pay all your travel and living expenses. These elective conferences are held at our Jackson, Minnesota, headquarters or at a location chosen by a majority vote of all franchisees. (Franchise Agreement, Paragraph 9.)

Advertising

Belmont provides advertising materials and services to you through a national advertising fund (the “National Fund”). Materials provided by the National Fund to all franchisees include video and audio tapes, mats, posters, banners, and miscellaneous point-of-sale items. You will receive one sample of each at no charge. If you want additional copies, you must pay duplication costs. (Franchise Agreement, Paragraph 10.)

You may develop advertising materials for your own use, at your own cost. Belmont must approve the advertising materials in advance and in writing. However, all Internet advertisements must be prepared and posted by Belmont only. (Franchise Agreement, Paragraph 10.)

Belmont occasionally provides for placement of advertising on behalf of the entire Belmont system, including franchisees. However, most placement is done on a local basis, typically by local advertising agencies hired by individual franchisees or advertising cooperatives. Belmont reserves the right to use advertising fees from the Belmont system to place advertising in national media (including broadcast, print, Internet, and other media) in the future. In the past, Belmont has used an outside advertising agency to create and place advertising. Neither Belmont nor its affiliate receives payment from the National Fund. Advertising funds are used to promote the products sold by the franchisee and are not used to sell additional franchises. (Franchise Agreement, Paragraph 11.)

The National Fund is a nonprofit corporation which collects advertising fees from all franchisees. Each franchisor-owned store of Belmont contributes to the National Fund on the same basis as franchisees. All payments to the National Fund must be spent on advertising, promotion, and marketing of goods and service provided by Belmont Muffler. You must contribute the amounts described in Item 6, under the heading “Advertising fees and expenses.”

The National Fund is administered by Belmont’s accounting and marketing personnel under the direction of the Advertising Council. The Advertising Council acts as the board of directors of the National Fund. The Advertising Council has eight members: the President, Treasurer, Vice President-Marketing, and Vice-President-Operations of Belmont; and four franchisee representatives who are elected by the governing board of the Belmont Franchisee Advisory Council. Belmont may change the number of Advertising Council members, but not the portion of managers/franchisees. We cannot dissolve the advertising council without the approval of the Belmont Franchisee Advisory Council. (Franchise Agreement, Paragraph 11.)

An annual audited financial statement of the National Fund is available to any franchisee upon request. During the last fiscal year of the National Fund (ending on December 31, 2006), the National Fund spent 39% of its income on the production of advertisements and other promotional materials, 36% for media placement, 18% for general and administrative expenses, and 7% for other expenses(the purchase of glassware given to Belmont customers as part of a promotional campaign).

Once your shop opens, you must participate in the local advertising cooperative established in your Designated Marketing Area where your store is located. The amount of your contribution to the local advertising cooperative is described in Item 6 under the heading “Advertising Fees and Expenses.”

Each local advertising cooperative must adopt written governing documents. A copy of the governing documents of the cooperative (if one has been established) for your Designated Marketing Area is available upon request. Each cooperative may determine its own voting procedures; however, each company-owned Belmont Shop will be entitled to one vote in any local advertising cooperative.

The members and their elected officers are responsible for administration and operation of the cooperative. Advertising cooperatives must prepare quarterly and annual financial statements. The annual financial statement must be prepared by an independent CPA and be made available to all franchisees in that advertising cooperative.

Computer Requirements

Belmont requires you to have a computer system and Internet access. Belmont does not specify specific computer hardware or an Internet supplier. However, you must have Microsoft Word, Access, and Excel programs. Your computer must be in good repair, with sufficient memory to carry out ordinary business functions, as provided in the Operating Manual. You also must buy an electronic cash register from an approved supplier. See Items 7 and 8 of this Disclosure Document. Belmont will not have independent access to the electronic cash register or computer system, but reserves the right to conduct periodic audits of any accounting records contained in such hardware.

Operating Manual

Belmont will loan you a copy of our operating manual that contains mandatory and suggested specifications, standards, and procedures. This manual is confidential and remains our property.

Belmont will modify this manual, but the modification will not alter your status and rights under the Franchise Agreement (Franchise Agreement, Paragraph 9.) The table of contents is attached as Exhibit F.

Training Program
Subject	Hours ofClassroom Training	Hours of Training On-The-Job	Location
Real Estate and Development	8	20-30	Franchise Market Area
Administration	24	24	Jackson, Minnesota
Operations Training	40	160	Jackson, Minnesota
Store Opening Assistance	0	80	Franchised Location
Follow-up Training	0	24-40	Franchised Location

Belmont conducts training programs for both you and some of your employees. The training program will include four segments, which are conducted as needed. Belmont does not charge for this training or service, but you must pay the travel and living expenses for you and your employees. All training occurs at Belmont’s Jackson, Minnesota, headquarters, the first weekend of each month.Training is conducted by Mark Smith, who has 20 years of experience in operating a muffler shop, 12 years of that with Belmont.

Belmont’s Real Estate & Development Training introduces you to the site selection, real estate, and construction and acquisition strategy portions of the business. It will begin promptly after you sign the Licensee Agreement and will include 1 day of orientation and 2-3 days of site visits once a site is identified. You (or if your business is a corporation or partnership, a principal of the business)must attend and complete, to Belmont’s satisfaction, Belmont’s Real Estate & Development Training.

Belmont’s Administration Training provides you with business training and store management training. The program introduces you to the human resources, compensation, fleets, marketing, legal, EH&S, credit, security, training, point of sale, and pricing aspects of the business. The Administration Training will begin approximately 45-60 days before the opening of your initial store, and will include approximately 3 days of classroom instruction and approximately 3 days of on-the-job training at stores operated by Belmont affiliates or licensees. You (or if your business is a corporation or partnership, a principal of the business) must attend and complete, to Belmont’s satisfaction,Belmont’s Administration Training.

Belmont’s Operations Training for your initial manager focuses entirely on store management and is intended to train qualified individuals to manage stores. The Operations Training will begin approximately 45-60 days before the opening of your initial store and will include approximately 5 days of classroom instruction and approximately 20 days of on-the-job training at a store operated by a Belmont affiliate or licensee. Your initial manager must complete, to Belmont’s satisfaction, Belmont’s store management training program portion of Operations Training before your store opens.

Belmont’s Store Opening Training is designed to assist you in the opening of a new store. Store Opening Training will be held at your store, approximately 1 week before the opening of your store, and will include operational training and assistance. The exact duration and timing of Store Opening Training, however, will depend on your preparation,

Approximately 3-6 months after your first store opens, an operations representative will return to your store and provide Belmont’s Follow-Up Training.

It is your responsibility to ensure that all subsequent managers and employees are trained in Belmont’s systems and procedures and that Belmont’s systems and procedures are utilized at your store. Belmont may audit your store at any time to ensure compliance with Belmont systems and procedures.

Territory is an area where, historically, a lot of disputes occur because a franchisor either (i) does not follow the representations made in the FDD when assigning a territory or (ii) assigns territory prematurely. Retail and service-based franchises handle territory a bit differently. For a service-based business, you usually know the territory at the time the franchise agreement is signed and the protected territory description should be included in the Territory Attachment. For a retail-based business however, it is unlikely that you will know the specific territory when the franchise agreement is signed, unless the physical location of the outlet has already been approved by you and secured (through real estate purchase or lease) by the franchisee. If the physical location of the outlet is unknown when the franchise agreement is signed, then the Territory Attachment should include a statement that reads: *PROTECTED TERRITORY WILL BE DETERMINED AND INSERTED AFTER A SITE FOR THE OUTLET HAS BEEN APPROVED BY THE FRANCHISOR AND SECURED BY THE FRANCHISEE. Some brands will wait until a location is identified to sign a franchise agreement; however, we think that is a mistake. You want your franchisee fully committed to the brand before you start looking at or approving real estate. Until they sign a franchise agreement, they can just walk away, and you don’t want to be giving them secrets without a valid franchise agreement in place.

Best Practice

If your franchisee must first secure a physical location for the franchised outlet, we recommend you designate a non-exclusive “Site Search Area” that is broader than the ultimate protected territory. We also recommend that you describe the Site Search Area in general geographic terms, such as a town, city, or county, and avoid using a map, as franchisees will assume that this map is their “exclusive” territory.

We usually call the franchisee’s territory a limited protected territory. Many disputes over Item 12 occur concerning exclusive and non-exclusive territories. For most franchisees, they expect that they’re getting some type of exclusive, protected territory. However, in the franchise agreement, franchisors are almost always going to reserve certain rights to themselves to sell products and services in that territory, even though they have a franchisee there. For example, a food service concept franchisor may want to provide sauces or frozen meals to grocery stores in the territory. If it’s a specialty retail store, maybe they sell products over the internet. More importantly, by making this distinction, you can have an option to add products in a department store or sell in airports, stadiums, or at special events. Ultimately the franchise may be acquired or sold to a competitor. In this case, the franchisor may be operating and competing in this same territory, and if you don’t have broad enough language in your franchise agreements, you could be limiting the pool of future potential suitors.

When you’re talking about long-term value, a new franchisor should be very careful not to ever use the words “exclusive territory” because you’re always going to have various exclusions to the territory. When preparing your FDD, we’re going to use broad enough language that protects not only the integrity of the system but also your exit strategy options. So, when talking about territories with your franchisees, you should never use the word “exclusive”. Always remember, the language you use when talking to prospects and your franchisees is just as important as the language in the contracts and sometimes even more important.

If you follow our best practice, you will see the following in your FDD:

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.

Whenever you reserve rights to sell products or services in the franchisee’s territory through your own or other franchised outlets, the regulations require the above language. We cannot alter this language in any way. This language will be required, for example, if you reserve rights to open “non-traditional” outlets (such as at airports, arenas, hospitals, or universities), if you control Commercial or National Accounts that may generate business in the territory, or if you allow franchisees to service pre-existing clients who may be located in another franchisee’s territory. This clause is quite common, and we can help coach you on how to have those conversations with potential franchisees that push back on the definition.

One of the biggest mistakes emerging franchisors make early on is they give away territories that are way too large. Another common mistake made by new franchisors is agreeing to rights of first refusal. This is a big problem that makes it harder to sell new territories because of your earlier commitments. It’s also not uncommon if you start doing many deals that you lose track of what first refusal rights you have given in earlier deals and then sell a new deal in violation of the old deal with overlapping franchisee commitments. That’s a big headache, and unfortunately, one that happens too often.

Granted, you may have to give away a huge territory to your first franchisees to get the system started, but you should know it is not a cost-free transaction. You will regret it. You have to make a judgment balancing the cost of the deal against the cost of your future regret. If you look at any mature franchisor and see where they were founded, often you will see huge territories around their home office. It can even impact the franchisee’s local sales because the brand doesn’t have proper market penetration if those first franchisees with a giant territory act as squatters without maximizing the territory. It’s just human nature for the franchisees to want more, and it happens in every franchise system. It’s your job as the leader of the system to be aware of the issue, to explain it to your franchisees, and to strike the right balance.

Sample Item 12

ITEM 12: TERRITORY

You will receive an exclusive territory with a minimum population of 50,000 people. You will operate from one location and must receive our permission before relocating. We will not operate stores or grant franchises for a similar or competitive business within your area.

You are not restricted from selling Belmont products and services to customers residing outside your territory. Except when advertising cooperatively with appropriate franchisees, you are restricted from advertising outside your territory without prior written consent. You may not engage in any mail order solicitations, catalog sales, telemarketing, Internet, or television solicitation programs or use any other advertising media outside of your territory without prior written approval.

We retain the right, in our sole discretion, to offer goods and services identified by brands we control through channels of distribution other than through Belmont Muffler Shops to locations and customers located anywhere, including those residing in your territory. We also reserve the right to sell goods through mail order, catalog sales, telemarketing, Internet, television, newspaper, and any other advertising media to consumers located anywhere, including within your territory.

You do not receive the right to acquire additional franchises within your area.

There is no minimum sales quota. You maintain rights to your area even if the population increases.

Item 13 requires disclosure of and certain information about the primary marks that the franchisee will use to identify the franchised business. These means that you do not have to disclose every trademark that you own. Our best practice recommendation is to keep it simple and clean with just your principal mark and your logo being disclosed in the FDD.

Technically speaking, you do not need a federal trademark to franchise. However, it is a massive mistake not to have a federal trademark. Certain states will require a special registration if you don’t have a federally registered trademark. At the end of the day, franchising is a licensing agreement, and the trademark is at the heart of what you are licensing.

An issue that comes up infrequently but is worth noting is whether the prospect or the franchisor should investigate the area where this prospect is considering to ensure that no one is using your trade name. If someone is using the name in that area, you should discuss with us about sending a cease-and-desist letter. If the user has superior rights to the name because its use predated your federal trademark registration, your franchisee will not have rights to the name in their locality. This user can not only continue to use that name in that area, but they can exclude others, including your future franchisee.

Sample Item 13

ITEM 13: TRADEMARKS

We grant you the right to operate a shop under the name “Belmont Muffler Shop.” You may also use our other current or future trademarks to operate your shop. By “trademark,” we mean trade names, trademarks, service marks, and logos used to identify your shop. We registered the trademark on the United States Patent and Trademark Office principal register on May 11, 1993, as Number 379286.

You must follow our rules when you use these marks. You cannot use a name or mark as part of a corporate name or with modifying words, designs, or symbols, except for those which we license to you. You may not use Belmont’s registered name in connection with the sale of any unauthorized product or service, or in a manner that we have not authorized in writing.

On June 4, 2003, the United States Patent and Trademark Office rejected Belmont’s application to register the mark “Super Mufflers” because the mark was found to be confusingly similar to a previously registered mark.

Our inability to register this mark on the federal level permits others to establish rights to use the Super Mufflers mark. Such use of the Super Mufflers mark does not occur in areas where our franchisees are operating or advertising under the mark, or in the natural zone of expansion for Belmont’s shops. In addition, others outside the Belmont system who use the Super Mufflers mark must act in good faith and without actual knowledge of our prior use of the mark. However, if others establish rights to use the Super Mufflers mark, we may not be able to expand into these areas using that mark.

No agreements limit our right to use or license the use of Belmont’s trademarks.

You must notify us immediately when you learn about an infringement of, or challenge to, your use of our trademark. We will take the action we think appropriate. While we are not required to defend you against a claim against your use of our trademark, we will reimburse you for your liability and reasonable costs in connection with defending our trademark. To receive reimbursement, you must have notified us immediately when you learned about the alleged infringement or challenge.

You must modify or discontinue the use of a trademark if we modify or discontinue using it. If this happens, we will reimburse you for your tangible costs of compliance (for example, changing signs). You must not directly or indirectly contest our right to our trademarks, trade secrets, or business techniques that are part of our business.

Richard R. Roe is currently doing business as Belmont Muffler Shoppe at 4231 Main Street, Reno, Nevada. We believe that this is an infringing use of our federally registered trademark “Belmont Muffler Shop,” and we have filed an action to enjoin Mr. Roe and to recover damages. If the court holds that Mr. Roe’s use is not infringing, Belmont may not be able to use Belmont’s trademark in Mr. Roe’s immediate area. (Belmont Muffler Shop v. Belmont Muffler Shoppe, No. 8899 (D. Nev. Filed April 15, 2006).

See Tom Spadea’s article in the Franchise Dictionary Magazine “Is Your Brand Name Really Yours?”

Item 14 is your “secret sauce” or proprietary information. As a rule, we claim everything as proprietary; the website, the contents of the manual, the methods, the advertising, the training program, etc. If you have any patents or other very specific proprietary information, let us know so we can call it out generally in this section.

You must also make sure all of your key people are signing a confidentiality and non-compete agreement. If you don’t respect the information and don’t take steps to protect it, you’re going to have a hard time legally enforcing the confidentiality of your information. For example, if you have secret recipes, make sure anybody who has access to those recipes signs an NDA. Otherwise, it’s going to escape into the public domain. And once it becomes generally available in the public domain, you no longer can protect the information and stop others from using it.

Sample Item 14-1

ITEM 14: PATENTS, COPYRIGHTS, AND PROPRIETARY INFORMATION

You do not receive the right to use any item covered by a patent or copyright, but you can use the proprietary information in the Belmont Operating Manual. The Operating Manual is described in Item 11. Item 11 also describes limitations on the use of this manual by you and your employees.

You must also promptly tell us when you learn about the unauthorized use of this proprietary information. We are not obligated to take any action, but we will respond to your notification of unauthorized use as we think appropriate. We will indemnify you for any loss you sustain as a result of any action brought by a third party concerning your use of this proprietary information.

Sample Item 14-2

ITEM 14: PATENTS, COPYRIGHTS, AND PROPRIETARY INFORMATION

U.S. Patent No. 399442 was issued to CTF International, Inc. on December 4, 1993. It describes a process for exhaust system installation. The process describes the steps in making a straight length of exhaust pipe, bending this pipe, coating the inside and outside of this pipe with our Pipe Protector, and installing the exhaust pipe on a motor vehicle. You will use equipment utilizing this process.

Our right to use or license this patent is not materially limited by any agreement or known infringing use.

You must tell us immediately if you learn about an infringement or challenge to our use of this patent. We will take action that we think is appropriate. You must also agree not to contest our interest in these or our other trade secrets.

If we decide to add, modify, or discontinue the use of an item or process covered by a patent or copyright, you must also do so. Our sole obligation is to reimburse you for the tangible cost of complying with this obligation.

Although we are not obligated to defend your use of these items or processes, we will reimburse you for damages and reasonable costs incurred in litigation about them.

Do you want to have absentee owners, or do you want your franchisees running the business as the manager of that franchise business? Even if the franchisee is not on-site, are you going to require a manager? Would this manager need to be approved and go through the initial training with the franchisor? Item 15 is where you make these disclosures.

Best Practice

For startup franchisors, and really most franchisors, we believe they should require their franchisees to participate in the business. Franchising is not only about obtaining the financial capital from the franchisee; it is about getting the right human capital to run the business that separates the winners from the losers. So even if they’re not in the store every day, you should require direct management and make it an obligation to participate in the business. The franchisee should be responsible as they are taking an enormous business risk, and so are you by trusting your brand standards with the franchisee.

While franchising is a business about human capital, there are certain concepts where the investment is so high that a franchisee may have other people invest with them, such as friends and family who will be passive investors. But a significant issue with having a passive investor is that the franchisor needs to have a relationship with the franchisee, and if the franchisee is a passive investor, that franchisee is not involved. They might have managers, but the franchisor doesn’t have a relationship with the manager, and this really speaks towards accountability. If you are going to hold your franchisee accountable for brand standards, paying bills, and growing the business, and they’re not participating in the actual operation, you will have difficulty holding them accountable. You should create the expectation that they should be participating and responsible for running the business. It could be as simple as monthly board meetings. The key is that you’re going to hold the franchisee accountable and you need to communicate that before you award them a franchise.

Entity

Your franchisee will probably want to use an entity to act as the franchisee for various tax and liability protection reasons. Still, our standard is that the individual also signs the franchise agreement personally. Those valid liability protections are meant to protect the franchisee from the general public and vendors, not giving them an out on their responsibilities to you as their franchisor. Because we require them to sign on as an additional franchisee personally, they don’t have to sign a personal guarantee which is normally disclosed here in Item 15. However, we do expect the franchisee’s spouse to sign a spouse guarantee, and we will disclose that in Item 15. This is an area where you might get pushback from new franchisees, and when the time comes, we will advise you that some flexibility here is normal. The most important part is that the spouse recognizes that they are under confidentiality and non-compete agreements, even if you are willing to waive the financial responsibility in limited situations.

Sample Item 15-1

ITEM 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS

If you are an individual, you must directly supervise the franchised business on its premises. If you are a corporation, a person who owns at least a 1/3 share of the corporate equity must perform the direct, on-site supervision of the franchised business.

Sample Item 15-2

ITEM 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS

We do not require that you personally supervise the franchised business, but we do recommend it.

In any case, the business must be directly supervised “on premises” by a manager who has successfully completed our training program. The on-premises manager cannot have an interest or business relationship with any of Belmont’s business competitors. If the franchisee is a corporation or a partnership, the manager need not have an ownership interest in it. The manager must sign a written agreement (Exhibit G) to maintain confidentiality of the trade secrets described in Item 14 and to conform with the covenants not to compete described in Item 17.

This section is pretty straightforward and one of the key factors that makes your business a franchise. Our guidance is that you’re always going to dictate what your franchisees can and can’t sell. Even if they want to sell something atypical, we are going to insist they get your permission first and that you have the right at any time to revoke that permission. Only by controlling what the franchise can and can’t sell can you maintain brand standards over the long term.

Sample Item 16

ITEM 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL

We require you to offer and sell only those goods and services that we have approved (see Item 9).

You must offer all goods and services that we designate as required for all franchisees. These required services are muffler inspection, repair, and replacement. Parts, supplies, and equipment used in your Belmont Muffler business must be approved by us (see Item 8).

We have the right to add additional authorized services that a franchisee is required to offer.

There are no limits on our right to do so except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $5,000 per year.

We also designate some services as optional for qualified franchisees. Current optional services are brake inspection, repair, and replacement; tire rotation, wheel balancing and alignment; and rustproofing. To offer optional goods or services, you must be in substantial compliance with all material obligations under the franchise agreement. In addition, we may require you to comply with other requirements, such as training, marketing, or insurance, before we will allow you to offer certain optional services.

Learn more about Item 16.

This section summarizes the provisions of the franchise agreement regarding renewals, transfers, termination, and dispute resolution. For purposes of the FDD, we will call out the clauses that address these various issues.

The main question we will have for you in this section is related to how you want to resolve disputes with your franchisees. Our standard process for dispute resolutions is to start with non-binding mediation by bringing your non-compliant franchisees, or franchisees that believe you are not fulfilling your obligations, to the President/CEO of the franchisor for an in-person meeting to try and work out the problem. If it is not resolved, then you can take the next step to court (or arbitration) if necessary. Again, we prefer a gradual escalation of formality in the hopes that all disputes are resolved through negotiation.

We will insert our current best practices into your franchise agreement and ask that you read over them, understand them, and if you disagree or wish to change anything, let us know.

Agreement Term & Renewal

Many franchisors, especially when they start out, are concerned about locking in someone for 10 years or longer because they are just putting a toe in the water, testing out whether or not their brand and system can grow as a franchise. Especially service brands, without a lease or big SBA loan driving the term higher, you see many brands with five-year terms. Some think a five-year term is advantageous to the franchisee and will be perceived by them as better than a longer-term commitment; however, the exact opposite is true. A franchisee is making a commitment to build a business and a bedrock factor of any business is certainty. If the franchise agreement can terminate or dramatically change in five years, then how can franchises be certain they have a sufficient runway to be successful?

Banks and landlords recognize that a longer term is better for the franchisee. They also feel that a shorter term is worse for the franchisee. However, a shorter term doesn’t just hurt the franchisee. Remember that you are building your system with the end mind. When it comes time to harvest your brand and find a private equity buyer, longer terms are enormously important. PE firms are looking for future predictable cash flow and will directly calculate expected future royalties by relying on the remaining terms in your franchise agreements. The franchisees may have certain automatic rights to renew, but you as the franchisor can’t force it. Bottom line – think long-term by having a long term!

Litigation or Arbitration

There’s no one correct answer regarding selecting arbitration or litigation, and you will need to discuss this with your franchise attorney so you can make the final decision. The advantage of arbitration is that it is your best hedge against a class-action lawsuit in that you can prevent your franchisees from ganging up on you. The disadvantage to arbitration is that it is costly as you have to pay not only your own legal expenses but for the arbitrator as well. But that burden on you also creates a burden and disincentive for the franchisee wanting to fight.

On the flip side, we believe you’re better off in court because judges, in our experience, are more likely to take a narrower construction of a written agreement. Remember that judges, in contentious cases, have to issue written opinions that are subject to appeal. Arbitration has a much higher probability to split the baby and look at the “fairness” and “equity” of the situation in addition to the contract. That tilt usually benefits the franchisee as they are usually the ones not complying with their obligations and suffering the greater financial loss in the dispute. The arbitrator’s decision will most likely also stay confidential and not be subject to appeal. The confidentiality, of course, can be beneficial as you are not creating a public record of a private fight. The non-appealability of an arbitrator’s award should factor into your decision of whether to litigate or arbitrate.

There is no right answer, and it changes over time. However, our opinion is litigation as a way to resolve very contentious disputes is better for the franchisor.

Best Practice

We believe that great franchisors are not overbearing or overly aggressive with their enforcement and do everything they can to avoid formal disputes. That’s the pathway to building generational wealth. You will hear some franchise attorneys say litigation is part of being a franchise, or it’s inevitable. It is not inevitable. There are plenty of franchisors that grow to hundreds of units with zero litigation. A lot of litigation happens because of ambiguity, misunderstandings, and when people don’t come to a meeting of the mind at the outset of the relationship. If you are in a fight, you want to ensure you are on the right side of the facts and doing it because of a threat to your brand, not because you are upset.

You should only really find yourself in court if someone is knocking off your brand name, trying to compete against you unfairly, or grossly misrepresenting your brand. If that’s the case, you should drag them into federal court and take them out for a beating in the woodshed to show your entire system what is and what is not acceptable behavior. But don’t do it on a close call. Just like a nation should only go to war as a last resort when all other diplomacy fails, you shouldn’t start firing missiles at the first sign of non-compliance.

When it is a close call, we encourage you to have some empathy for the fact that the franchise failed and probably went broke trying to do what you did. Take the high road, write them a check, have them sign a confidentiality agreement, and be done with it. Either way, it’s going to cost you money, whether you fight it in court or allow the franchisee to disappear gracefully.

If your attitude is that you prefer to defend your brand through litigation for each and every infraction, then we’re probably not the law firm for you. We are here to help you build the multi-million-dollar enterprise, and our belief is that over-aggressive litigation is not the way to do it.

This item covers public figures who lend their name or image to the franchise, control or manage the franchisor, or invest in the franchisor.

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. Typical public figures include sports stars, actors, musicians, and similar celebrities.

The only problem with having a public figure as part of your brand, either as an investor or as the spokesperson, is that the franchisee thinks they’re buying into what will be more successful because this public figure is successful. The franchisee then ends up being disappointed because they don’t have access to celebrity. So, using a public figure as part of your growth strategy carries a risk that may outweigh the benefits.

That being said, if you have a public figure promoting the brand or part of the management team, you have to disclose it. If you have anybody famous who’s remotely involved and even remotely famous, let us know so we can determine if we need to put them into Item 18.

Sample Item 18

ITEM 18: PUBLIC FIGURES

Belmont has paid Ralph Doister $50,000 for the right to use his name in promoting the sale of our franchise. This right expires on December 31, 2008. Belmont has produced newspaper ads, a brochure, and a video which feature Mr. Doister. Mr. Doister does not manage or own an interest in Belmont.

What Is FDD Item 19: Financial Performance Representation (FPR)?

This section contains financial performance representations of your franchisees and corporate outlets. You’re not required to have an Item 19 disclosure, and there are some opinions out there that you shouldn’t. We, however, rarely recommend not having Item 19 disclosures. Remember, you can’t talk about financial performance, average unit sales, profitability, etc., if it’s not disclosed in the FDD. If you want to talk numbers, then you need to tell us those numbers so we can get them into your FDD in an acceptable format. The problem of not putting any numbers in your Item 19 is the burden in the future is on you to show you never gave the prospect any numbers in the sales process. Proving a negative is hard to do. But, if you have Item 19 disclosures, the burden is on them to prove you gave them something contradictory to what you can prove you disclosed to them in Item 19.

Why is FDD Item 19 Important?

In the past, the majority of franchisors did not include Item 19 information, and the common opinion was it was riskier to disclose numbers in case franchisees underperformed them. However, as noted above, in our professional experience, the opposite is true. In the non-franchise/non-FDD world, it inevitably turns to financial performance whenever you’re discussing a business opportunity, either casually or formally. Everyone wants to know “how much money can I make,” and it is our very strong recommendation that you should have an Item 19 disclosure to build transparency and to help guide the prospect into finding their own answer to that question. If you feel you have a reason that you should not have Item 19 information, we encourage you to discuss it with us.

What Information Must Be Included in Item 19?

As you think about what numbers to include in your financial performance representation, don’t get into the weeds, but just tell us the best way to tell the financial story of a unit – whether it’s average unit volume, profit margins, etc. Explain to us as if there was no FDD or franchise rule, and you were talking to your brother and telling them, “Listen, this is a great business… and here are some numbers.” Put that on paper, and we’ll take it and turn it into an allowable disclosure. Don’t start with the regulatory rules. Start with the story you want to tell and then let us fit it into the regulation. This helps tell the cleanest story of what is possible if someone does well in operating the franchise. That is the goal, to give them a range and a target, not to cross every “t” and dot every “i” on their projections.

Many feel that Item 19 is the most important piece for the prospect to read in the FDD. However, although we think it is important, we also think franchisors put too much weight on it. When we talk to a franchisee, we explain that every franchisor has people financially at the top, bottom, and middle, with the single biggest difference being the franchisee. A franchisee is not buying an apartment building, mutual fund, or an investment with a predictable rate of return. They are starting a business using your brand, methodology, and experience. The FDD simply tells them what the sport is and how to keep score; it doesn’t tell them what their game’s final score will be. At the end of the day, it’s the franchisee that has to go out and win the game. Item 19 presents the scores of the other people who played this game to help the prospect understand the game and know what winning looks like.

A lot of franchisors get over-obsessed with disclaimers in this Item about historical results, such as results are going to be dependent on your management style, your location, your attitude, the weather, etc. etc. etc. You have to remember, there’s only one disclaimer permitted by the rule and that’s the one we will use. It reads:

For historical representations—

Some [outlets] have [sold] [earned] this amount. Your individual results may differ. There is no assurance that you’ll [sell] [earn] as much.”

For projections—

These figures are only estimates of what we think you may [sell] [earn]. Your individual results may differ. There is no assurance that you’ll [sell] [earn] as much.”

Item 19 is one that state examiners love to rip apart. Our goal is to keep it simple, readable, and compliant with federal and state rules. Insisting on added disclaimers or explanations will only delay approval of your registration application.

Finally, even if you’re not registering in all states at this time, you should still put Item 19 in a format that is accepted by all states as you may at some point expand nationally and want to be prepared. In addition, following the generally accepted state guidelines is another level of protection in a future fight with a franchisee.

What Does Item 20 Disclose?

From a franchisee perspective, Item 20 is the single most important item in the FDD. It contains the outlet count, by state, of your corporate-owned and franchised units, and a list of all current and former franchisees, with their contact information. As a startup franchise, this will be blank, but as you grow, you will record how many outlets you had at the beginning of the year and how many outlets you have at the end of the year. If there’s a change, you will specify what those changes are, i.e., how many opened, closed, were terminated, transferred, or ceased operations for another reason.

As a new franchisor with zero outlets, you should keep in mind what this section will look like as you grow. Understand that as a franchisor, you are a semi-public company and Item 20 is your scorecard of how far and wide you have scaled the business. This is also where franchisees get to learn about you in a forum outside of your control. This is a good time to reflect on what the industry calls “validation”. Validation is when prospective franchisees call your current and former franchisees to validate the information they are learning from you and what you have stated in the FDD. You will tell them this is a great business, you will support them, and you have a great team. Franchise prospects will ask your franchisees if they agree. Your success will turn on how they answer those questions.

Why is Item 20 Critical?

A major reason franchisors never make it past five units is their first few franchisees struggle, are not happy, and don’t feel the love. If your first franchisees struggle, they will be in next year’s Item 20, they will get calls from prospective franchisees, and you don’t do any more deals.

This section, as proscribed by the regulation, can be a bit confusing and tricky to keep straight. But those are the rules, and we have to abide by them. You can see the categories below that are required. The best practice is to keep excellent records of each franchisee, transaction, and event to make the Item 20 process simple each year. Importantly, an outlet “counts” in Tables 1-4 of Item 20 if it has opened, or if it has stopped operations for any reason. We are not counting franchise agreements, except for Table 5, where we include a count of franchise agreements that are signed but the franchisee has not yet opened the business by the end of the franchisor’s last fiscal year.

Item 20 is also where you will need to disclose any independent franchisee association. If you have received formal notice within the timelines proscribed by law, even if you have an adversarial relationship with the association, you must disclose them in Item 20. If you know of any such organization or have gotten a formal notice, please let your franchise attorney know about it so we can properly disclose it.

Warning, Item 20 is an item that tends to derail the timeline on FDD renewals due to franchisors not staying current or keeping good records. So, keep good notes and records and use the systems we’ve developed for you as a client of the firm.

Item 20 Examples

Sample Item 20, Table No.1

ITEM 20: OUTLETS AND FRANCHISEE INFORMATION Systemwide Outlet Summary For years 2005 to 2007

Outlet Type	Year	Outlets at the Start of the Year	Outlets at the End of the Year	Net Change
Franchised	2005	859	1062	+203
	2006	1062	1296	+234
	2007	1296	2720	+1,424
Company Owned	2005	125	145	+20
	2006	145	76	-69
	2007	76	141	+65
Total Outlets	2005	984	1207	+223
	2006	1207	1372	+165
	2007	1372	2861	+1,489

Sample Item 20, Table No. 2

State	Year	Number of Transfers
NC	2005	1
	2006	0
	2007	2
SC	2005	0
	2006	0
	2007	2
Total	2005	1
	2006	0
	2007	4

Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor) for years 2005 to 2007.

Sample Item 20, Table No. 3

Status of Franchise Outlets For years 2005 to 2007

State	Year	Outlets at Start of Year	Outlets Opened	Terminations	Non-Renewals	Reacquired by Franchisor	Ceased Operations- Other Reasons	Outlets at End of Year
AL	2005	10	2	1	0	0	1	10
	2006	11	5	0	1	0	0	15
	2007	15	4	1	0	1	2	15
TX (Note 1)	2005	20	5	0	0	0	0	25
	2006	25	4	1	0	0	2	26
	2007	26	4	0	0	0	0	30
Totals	2005	30	7	1	0	0	1	35
	2006	36	9	1	1	0	2	41
	2007	41	8	1	0	1	2	45

Notes

(1) One outlet had several changes of ownership during the fiscal year. On February 1, 2006, Belmont reacquired a Texas outlet from its owner-franchisee and then resold it on March 1, 2006, to a new franchisee-owner. On December 1, 2006, however, the new franchisee-owner ceased operations.

Sample Item 20, Table No. 4

Status of Company-Owned Outlets For years 2005 to 2007

State	Year	Outlets at Start of Year	Outlets Opened	Outlets Reacquired From Franchisees	Outlets Closed	Outlets Sold to Franchisees	Outlets at End of Year
NY	2005	1	0	1	0	0	2
	2006	2	2	0	1	0	3
	2007	3	0	0	3	0	0
OR	2005	4	0	1	0	0	5
	2006	5	0	0	2	0	3
	2007	3	0	0	0	1	2
Totals	2005	5	0	2	0	0	7
	2006	7	2	0	3	0	6
	2007	6	0	0	3	1	2

Sample Item 20, Table No. 5

Projected Openings As of December 31, 2007

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

Sample Item 20: Outlets and Franchisee Information (Former Franchisee Contact Information)

Former Franchisee Contact Information

During the last fiscal year, several Belmont Mufflers franchisees have left the system. Two Belmont Muffler franchisees voluntarily ceased to conduct business:

John Smith
Denver, Colorado
Current business telephone number:
(111) 000-0000

Paul Berg
Austin, Texas
Last known home telephone number:
(222) 111-1111 .

One Belmont Mufflers franchisee did not renew:

Alice Harris
Atlanta, Georgia
[email protected]

One additional Belmont Mufflers franchisee has not communicated with Belmont Mufflers during the period 10 weeks.

Mary Peterson
Madison, Wisconsin
(123) 222-2222

If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.

Sample Item 20: Outlets and Franchisee Information (Previous Owner Information)

Previous Owner Information

We are offering for sale the Belmont Mufflers unit at:

171 Delfi Street
Arlington, VA 12345

Within the last five years, this specific unit was owned by two franchisees.

January 1, 2002 – March 15, 2003:

Thomas A. Fields
23 Newhampton Circle
Arlington, VA 12345
Current business telephone number: (124) 444-4444

Mr. Fields voluntarily terminated the franchise in order to pursue other interests.

March 16, 2003 – June 5, 2004:

On March 16, 2001, Belmont Mufflers reacquired the unit and operated it as a company-owned outlet until June 5, 2004.

June 6, 2004 – October 20, 2007:

Susan Wadsworth
86 Bratock Road
Arlington, VA 12345
Last known home telephone number: (124) 555-5555.

Ms. Wadsworth was terminated on October 20, 2007, for failure to pay royalties.

October 21, 2007 – to date:

On October 2, 2006, Belmont Mufflers reacquired the unit and continues to operate it as a company-owned unit.

Sample Item 20: Outlets and Franchisee Information (Confidentiality Agreement Disclosure)

Confidentiality Agreements

In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with Belmont. 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.

During the last year, Belmont entered into two agreements with franchisees that contained confidentiality restrictions (2 out of 100 franchisees, or 2% of our franchisees). In both instances, the confidentiality restrictions were signed as part of mutually agreed upon settlements of litigation.

Sample Item 20: Outlets and Franchisee Information (Franchisee Association Disclosure)

Franchisee Associations

Belmont Mufflers, Inc., created and supports the Belmont Mufflers Franchisee Association:

1234 Second Street Jackson, MN 55000.
(612) xxx-xxxx
[email protected], www.bmfa.org

The following independent franchisee organization has asked to be included in this disclosure document:

Muffler Franchisees of North America, Inc.
2222 Third Street
Albany, NY 11111 (222) 777-8888
[email protected]
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What is FDD Item 21?

Franchise Disclosure Document (FDD) Item 21 is a crucial section that provides an in-depth look at the franchisor’s financial statements. This information is vital as it helps potential franchisees evaluate the financial health and stability of the franchisor. Well-prepared financial statements can build trust and confidence, showcasing the franchisor’s ability to support its franchisees effectively.

Does My Franchise Need Financial Statements?

A franchisor that is not planning on registering in California, Illinois, Minnesota, New York, or Virginia does not need formal audited financial statements from a CPA in their first year of franchising. They just need an unaudited opening balance sheet prepared according to GAAP. However, we still recommend as a best practice that you engage a CPA with a franchising background in preparation for audited financial statements from day one. You will eventually need them after your first year, and it is better to set up the systems and be prepared for audited financial statements from the day you launch.

Going back to Item 1, when we talk about who is the franchisor, that is the entity that needs to show their financial statements. Our recommendation is always for new franchisors to start fresh with a new entity.

The financials are important and perhaps one of the top items scrutinized by potential franchisees. It is a very good barometer of the health of any business. It is also important to note that the books of a franchisor should not be run like the typical small business with a goal of tax avoidance. Don’t load up the franchisor with extra cellphones, club memberships, and other extraneous expenses that are not pertinent to running the franchisor business. That typical mindset held by most small businesses and small business accountants can be detrimental to your growth as a franchisor. Run those expenses through your company location if you have to.

The profits in the franchisor entity are what really drive wealth creation and are the ultimate objective scorecard that a future buyer will assess.

Best Practice

In the early stages, prospects and state regulators are going to be very suspicious of the undercapitalized franchisor. As a result, we recommend you try to put a minimum of $100,000 of unallocated capital into the business, just so you have some breathing room to support your initial franchisees.

While that’s not a rule, it’s a guideline that many states look at, and many prospects will also scrutinize.

Think of it from a prospect’s viewpoint: if someone is going to pay you a $30,000 franchise fee and you only have $10,000 in the bank when you start the business, why are they paying you a $30,000 franchise fee? Have empathy for what your initial franchisees are going to feel. You’re demanding that your franchisees are properly capitalized to run a successful location of your brand, so lead by example, showing them that you’re properly capitalized.

If you’re on a tight budget, you should be realistic about your growth. If you don’t have $100,000 in the bank, you should consider not going nationwide out of the gate. You’re going to incur a lot of expenses with a nationwide strategy, and it will be challenging to support franchisees that open far away from your home office. Your growth strategy should be center-out, so you can focus on the success of those first franchisees.

Warning: Be cautious of third-party sellers and brokers because they tend to encourage franchisors to register and sell everywhere. These are great options for companies prepared to grow quickly, but it brings with it another set of risks. Companies can fail in franchising by not growing, of course, but they can also fail by growing too quickly. Remember, the game is all about solid validation from each person listed in Item 20. If you can’t support these new businesses, they will not validate, which will stunt your growth.

Best Practice

As discussed above, break the habit of looking at your financial statements as a tax avoidance document. It is not a tax avoidance document. We encourage you to form a brand-new entity with very few transactions and keep it clean from the beginning. If you can avoid it, don’t even pay payroll. Instead, have a management fee for your corporate entity covering your cost and those of your key management team. The cleaner the better.

Should My Corporate Store Pay Royalties?

Absolutely! If you make $100 in profit, that $100 on the open market is worth the multiple of the earnings in the business it is generated in. If you pay that $100 in royalties to the franchisor, that $100 becomes an expense to your operating unit and profit in the franchisor. A typical small business, for example, might be worth 3x profits while a franchisor could be worth 10x profit or more. So, you just took $100, that was worth $300, passed it into the franchisor, and now it’s worth $1,000 because $1 in expenses to your corporate store is $1 in profits to your franchise system. This starts establishing, from day one, that every dollar in revenue in the franchisor is your highest and best dollar. And you don’t hurt your tax minimization strategy as you have more expenses now in the corporate store.

This is also one of the best ways to fund your franchisor. If you’re doing a million dollars in sales and charging 6% royalty, you now have a $60,000 cash flow into your franchisor, increasing the health of your franchisor. It also tells the story to your franchisees that the business can support being part of a franchise system. If you can’t afford to pay royalties out of your corporate store, maybe you have deeper issues you need to solve.

Item 22 includes a list of all the documents that the prospect is expected to sign. If there are any written contracts such as a multi-unit development agreement, personal guarantees, or promissory notes you are going to require, you need to disclose those here and include them as exhibits to the FDD.

Sample Item 22

ITEM 22: CONTRACTS

The following agreements and other required exhibits are attached to this disclosure document in the pages immediately following:

Belmont Franchise Agreement
Belmont Lease of Premises
USA Credit Corp. Equipment Lease
Belmont Equipment Purchase Note
Belmont Initial Fee Loan Agreement
Belmont Operating Manual Table of Contents
Belmont Confidentiality and Non-Compete Agreement for Outlet Managers
Belmont Non-Compete Agreement for Franchisee Shareholders
Belmont Guarantee of Performance for Franchisee Shareholders
Belmont Mufflers Audited Financial Statements for 2005, 2006, and 2007
Richard McDonald Audited Financial Statements for 2005, 2006, and 2007
CTF International Audited Financial Statements for 2005, 2006, and 2007
CTF International Guarantee of Performance
Receipts

What is FDD Item 23?

Item 23 are the receipts. For this section, you just have to tell us anyone who’s going to be a franchise salesperson. A franchise salesperson is a person that offers for sale, sells, or arranges for the sale of the franchise. This includes owners, employees, representatives, agents of franchisors, and third-party brokers who are involved in franchise sales activities. It does not include existing franchisees, unless they are providing franchise sales services on your behalf.

The Receipts are the last pages of the FDD and what we get your prospects to sign electronically through DocuSign when you use our Map System for disclosure. These signed receipt pages are your proof that you complied with the requirement of giving prospective franchisees a valid FDD in a timely manner prior to signing a contract or accepting any funds. You will notice a duplicate copy of the receipt page in your FDD. It’s not a typo. It’s required by the rule from a time prior to electronic receipts when a prospect would sign both and tear one out of the FDD for you to keep.

Sample Item 23

ITEM 23: RECEIPTS

Receipt

This disclosure document summarizes certain provisions of the franchise agreement and other information in plain English. Read this disclosure document and all agreements carefully.

If Belmont 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 Belmont 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].

Belmont’s sales agent for this offering is Roger Owens, 111 Capitol Street, Indianapolis, IN (123- 555-5555).

Issuance date: April 15, 2008

I received a disclosure document dated April 15, 2008, that included the following Exhibits:

Belmont Franchise Agreement
Belmont Lease of Premises
USA Credit Corp. Equipment Lease
Belmont Equipment Purchase Note
Belmont Initial Fee Loan Agreement
Belmont Operating Manual Table of Contents
Belmont Confidentiality and Non-Compete Agreement for Outlet Managers
Belmont Non-Compete Agreement for Franchisee Shareholders
Belmont Guarantee of Performance for Franchisee Shareholders
Belmont Mufflers Audited Financial Statements for 2005, 2006, and 2007
Richard McDonald Audited Financial Statements for 2005, 2006, and 2007
CTF International Audited Financial Statements for 2005, 2006, and 2007
CTF International Guarantee of Performance

Date: _____________ Your name (Please print): ____________________________

Your signature: __________________________________________________

You should return one copy of the signed receipt either by signing, dating, and mailing it to Belmont at 111 First Street, Jackson, MN 55000, or by faxing a copy of the signed receipt to Belmont at (111) 223-3344. You may keep the second copy for your records.

You want to show the prospective franchisee that you have a system in place, and having a formal, well-thought-out operations manual is key. The FTC Regulation requires that we include the table of contents, page counts for each section of your manual, and total page count in Item 11. In the alternative, you may provide the prospect with an opportunity to review your manual to satisfy this regulatory requirement.

Four Main Functions of a Franchise Operations Manual

First, the Franchise Operations Manual is the authority document of the franchise system standards. The system standards are the standard procedures that a franchisor requires of all franchisees in order to duplicate the customer experience in every location. The customer experience is the driving force behind profitability. If you can duplicate a favorable customer experience, then you have a business that you can probably franchise successfully. Your Franchise Agreement will refer to the Franchise Operations Manual as the way the franchisee will execute the system standards. This way, as your system grows and your System Standards change, you only have to update the manual instead of updating the Franchise Agreement.

Second, the Franchise Operations Manual is the most effective tool for protecting your Brand. A company’s Brand is one of its most valuable assets. The Brand is also the asset that is at most risk when a company decides to franchise. When you franchise a concept, you are putting your Brand in the hands of other people, all of whom likely have different ideas about the best direction for the company. A properly prepared Franchise Operations Manual, with well-defined and organized system standards, will be one of the few tools you have to manage the Brand and control the franchisees when they try to act on their vision for what is best for your Brand.

Third, the Franchise Operations Manual will likely be the principal tool for training new franchisees. It is the “Your Company for Dummies” book. You have to assume that most of your franchisees will not have experience in your industry. They may not have any business experience at all. Your manual needs to be a document that not only trains them on your system of providing a favorable customer experience, but also one that brings them up to speed on how to manage a business.

Fourth, well-prepared documentation of the procedures that have helped make your company a success will help you sell your concept to potential franchisees. Put yourself in the shoes of a potential franchisee. If you received a Franchise Disclosure Document (FDD) that showed you that the company only had a 50-page document describing all of its operating procedures, you might be a little concerned as to the quality of the franchised business model.

Best Practice

In addition to annually looking at your franchise agreement and updating your FDD, this is a good time to go through the operations manual and make sure it is still current and accurate.

Pitfalls

Make sure your operations manual does not include employee training and HR rules, as that can get you into trouble down the road by creating liability to you for the actions of your franchisees.
Make sure your operations manual doesn’t put you in antitrust jeopardy either with pricing issues or other practices such as banning the practice of hiring employees from your fellow franchisees.

If you have any questions related to your manual, share those pertinent portions of your operations manual with us to make sure that what you put in writing is not something that could get you in trouble.

Learn more about Item 24.

The franchise agreement is the most important agreement for the franchisor. At a high level, the franchise agreement spells out your rights and obligations. It is the controlling document of the relationship. It is the most important document you have when you’re talking about harvesting your brand and selling the business. When you go to sell your business, if you have 50 units, you’re selling 50 franchise agreements and assignment to your trademarks.

A Multi-Unit Development Agreement or “MUDA” gives a developer the right to open multiple units within an agreed-upon area during a particular development timeframe. A MUDA is not a franchise agreement. It does not give the developer the right to open and operate a particular outlet. Instead, it is essentially a reservation of territory. Provided that the developer isn’t in default of any other agreements with you and is following the development schedule, you will reserve the territory for the developer’s future development.

Best Practice

When you sign the MUDA, the developer should sign the first franchise agreement for the first outlet at the same time. Once the developer signs a lease for the first outlet, is when we recommend the developer sign their second franchise agreement for the second outlet in the development schedule. The franchise agreement gives the developer the right to establish and operate a store and can represent as much to potential landlords. Upon the developer signing the lease for the second outlet, the developer should then sign a franchise agreement for the third outlet in the development schedule, and so forth.

Fees for Multiple Units

A good rule of thumb for the Development Fee is that you charge up front 100% of the initial franchise fee for the first outlet and 50% of the initial franchise fee for each additional outlet. The balance of the initial franchise fee for each additional outlet is due when the franchise agreement for that outlet is signed. This formula is the industry standard, so it’s not a law or a rule, and you’re welcome to change it, but most franchisors want their agreement to follow industry standards in this area.

And finally, a word of caution: Be careful with how large a territory you give someone. We’ve found the majority of multi-unit developers never open the number of units that are in their schedule.

These pages are for informational purposes only and do not establish an attorney-client relationship between the author and the reader. Additionally, we make no representations or warranty to any of the information as legal information is subject to change over time. Before taking action on any of the information presented, you must discuss this with your attorney to ensure it is relevant and applicable to your current situation.

2 What is an FDD?

2.1 The Franchisor Parents, Predecessors, and Affiliates - ITEM 1

Sample Item 1

2.2 Business Experience - ITEM 2

Sample Item 2

Best Practices

2.3 Litigation - ITEM 3

Sample Item 3

2.4 Bankruptcy - ITEM 4

Sample Item 4

2.5 Initial Fees - ITEM 5

Discounts for Candidates

Tips

Sample Item 5-1

Sample Item 5-2

2.6 Other Fees - ITEM 6

Sample Item 6

2.7 Estimated Initial Investment - ITEM 7

Best Practices

Sample Item 7

2.8 Restrictions on Sources of Products and Services - ITEM 8

Best Practices

Sample Item 8

2.9 Franchisee Obligations - ITEM 9

2.10 Financing - ITEM 10

Sample Item 10

2.11 Franchisor’s Assistance, Advertising, Computer Systems and Training - ITEM 11

2.11.1 Pre-Opening Obligations

2.11.2 Time to Open

2.11.3 Post Opening Obligations

2.11.4 Advertising Council

2.11.5 Advertising

2.11.6 Brand Fund

Financial Statement

Waive the Fee?

Best Practices

2.11.7 Computer Systems

Best Practice

2.11.8 Operations Manual

2.11.9 Training

Best Practice

Sample Item 11

2.12 Territory - ITEM 12

Best Practice

Sample Item 12

2.13 Trademarks - ITEM 13

Sample Item 13

2.14 Patents, Copyrights, and Proprietary Information - ITEM 14

Sample Item 14-1

Sample Item 14-2

2.15 Obligation to Participate in the Actual Operations of the Franchised Business - ITEM 15

Best Practice

Entity

Sample Item 15-1

Sample Item 15-2

2.16 Restrictions on What the Franchisee May Sell - ITEM 16

Sample Item 16

2.17 Renewal, Termination, Transfer, and Dispute Resolution - ITEM 17

Agreement Term & Renewal

Litigation or Arbitration

Best Practice

2.18 Public Figures - ITEM 18

Sample Item 18

2.19 Financial Performance Representation - ITEM 19

What Is FDD Item 19: Financial Performance Representation (FPR)?

Why is FDD Item 19 Important?

What Information Must Be Included in Item 19?

2.20 Outlets and Franchisee Information - ITEM 20

What Does Item 20 Disclose?

Why is Item 20 Critical?

Item 20 Examples

Sample Item 20, Table No.1

Sample Item 20, Table No. 2

Sample Item 20, Table No. 3

Sample Item 20, Table No. 4

Sample Item 20, Table No. 5

Sample Item 20: Outlets and Franchisee Information (Former Franchisee Contact Information)

Sample Item 20: Outlets and Franchisee Information (Previous Owner Information)

Sample Item 20: Outlets and Franchisee Information (Confidentiality Agreement Disclosure)

Sample Item 20: Outlets and Franchisee Information (Franchisee Association Disclosure)