Item 15 – Required Disclosures: Obligation to Participate
By Mario Herman, Esq.
Franchisees may have an obligation to actively participate in the operation
of the franchise. This issue is the basis of Item 15 in the Franchise Disclosure
Pursuant to the Federal Franchise Rule, a franchisor must disclose to each
prospective franchisee the franchisee’s obligation to participate personally in
the direct operation of the franchisee’s business and whether the franchisor
recommends participation. The franchisor is required to include in Item 15 of
the Franchise Disclosure Document (FDD) the obligations arising from any written
agreement or from the franchisor’s practice.
If personal ‘‘on-premises’’ supervision is not required, the franchisor is
required to disclose the following:
(i) If the franchisee is an individual, whether the franchisor recommends
compromises by the franchisee.
(ii) Limits on whom the franchisee can hire as an on-premises supervisor.
(iii) Whether an on-premises supervisor must successfully complete the
franchisor’s training program.
(iv) If the franchisee is a business entity, the amount of equity interest,
if any, that the on-premises supervisor must have in the franchisee’s business.
The franchisor must also disclose any restrictions that the franchisee must
place on its manager (for example, maintain trade secrets, covenants not to
While seemingly one of the more straightforward disclosures required by a
franchisor, this is an important disclosure to review, especially for those
considering purchasing additional franchise units, either at the time of initial
purchase or later in the relationship. It is important to know what the
franchisor requires regarding personal participation, so that you can adequately
plan for the operation of your franchised business. As always an experienced
franchise law attorney can assist you in reviewing and considering the
disclosures provided by the franchisor in its FDD, and assists you in
negotiating any changes that you might want to make as you anticipate your short
term and long term goals.
Mr. Herman based in Washington, D.C., represents franchisees
domestically and internationally negotiation, mediation, arbitration, and