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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 Document.

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 compete).

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 litigation.

mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)

 

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