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Understanding Important Requirements in Item 11

By Mario Herman, Esq.

Item 11 of the Franchise Disclosure Document provides information and disclosure relating to Electric cash registers, Computers and the Franchise Operations Manual. Itís important for prospective franchisees to understand what all of this means.

In an effort to ensure that prospective franchisees are fully informed regarding start-up ad operational costs, and provide other important information, the Federal Franchise Disclosure Rule requires that a franchisor disclose to its prospective franchisees whether the franchisor  requires the franchisee to buy or use electronic cash registers or computer systems. If it does, then the franchisor must describe the systems generally in non-technical language, including the types of data to be generated or stored in these systems.  Additionally, the franchisor must disclose:

(i) The cost of purchasing or leasing the systems.

(ii) Any obligation of the franchisor, any affiliate, or third party to provide ongoing maintenance, repairs, upgrades, or updates.

(iii) Any obligations of the franchisee to upgrade or update any system during the term of the franchise, and, if so, any contractual limitations on the frequency and cost of the obligation.

(iv) The annual cost of any optional or required maintenance, updating, upgrading, or support contracts.

(v) Whether the franchisor will have independent access to the information that will be generated or stored in any electronic cash register or computer system. If so, the franchisor must describe the information that the franchisor may access and whether there are any contractual limitations on the franchisorís right to access the information.

It is important that you review the FDD to know whether and how often you will be required to purchase and/or upgrade the above referenced equipment.  Important considerations include whether there is a limit on what you may be required to spend on such equipment and how often you will be required to upgrade.  These costs add up, and can subtract significantly from you bottom line, while potentially padding the franchisorís bottom line if the franchisor receives a rebate or other compensation from the supplier of such equipment. 

Additionally, a franchise is required under Item 11 to disclose the table of contents of the franchisorís operating manual provided to franchisees as of the franchisorís last fiscal year-end or a more recent date.  The franchisor must state the number of pages devoted to each subject and the total number of pages in the manual as of this date.  This disclosure may be omitted if the franchisor offers the prospective franchisee the opportunity to view the manual before buying the franchise.  Few, if any franchisors are willing to allow a prospective franchisee to review the operating manual before the sale of the franchise.  However, making such a request is something an experienced franchise law attorney may be able to negotiate for you with the prospective franchisor.

Mr. Herman, licensed in Washington, D.C., represents franchisees domestically and internationally in negotiation, mediation, arbitration, and litigation with their franchisors.

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