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
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.