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Item 16: Required Disclosures

Restrictions On What The Franchisee May Sell

By Mario Herman, Esq.

Prospective franchisees should understand their obligations under the franchise agreement. An important requirement, which is disclosed in the FDD under Item 16 addresses the sales of products and services.

Under the Federal Franchise Rule, a franchisor is required to disclose under Item 16 in its Franchise Disclosure Document (FDD) any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit access to customers, including:

(1) Any obligation on the franchisee to sell only goods or services approved by the franchisor.

(2) Any obligation on the franchisee to sell all goods or services authorized by the franchisor.

(3) Whether the franchisor has the right to change the types of authorized goods or services and whether there are limits on the franchisorís right to make changes.

These can be critical disclosures in certain types of franchise relationships. There can be serious economic consequences if the franchisorís requirements are over burdensome. For example, if your franchisor requires that you sell all goods or services authorized by the franchisor, and as you open your location, certain items are not selling well you may be required to carry such items even if perishable. This can affect the bottom line of your business.

The disclosures under Item 16 should be reviewed carefully in conjunction with other disclosures in the FDD, including Item 8, under which a franchisor is required to disclose its Restrictions on Sources of Products and Services, including whether the franchisor and/or its affiliates are or can profit from the sale of products and services to its franchisees. An experienced franchise law attorney can assist you prior to the time you purchase in reviewing such provisions in conjunction with one another, so that you will have a clearer picture of your prospective franchisorís requirements regarding products and services, and how it may affect your bottom line.

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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