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Required Disclosures - Item 11

Pre-opening Obligations

Site Selection and Site Issues

By Mario Herman

Prospective franchisees should be fully aware of the support that they will receive from the franchisor. There is a difference between what the franchisor may promise compared to their contractual obligations. This article adds clarity to this important aspect of the franchisee-franchisor relationship.

Pursuant To the Federal Franchise Rule, a franchisor is required to disclose to each prospective franchisee in Item 11 of the franchisor’s Franchise Disclosure Document information related to: the Franchisor’s Assistance, Advertising, Computer Systems, and Training. The franchisor must disclose the franchisor’s principal assistance and related obligations of both the franchisor and franchisee as to the above referenced items. For each obligation, the franchisor is required to cite the section number of the franchise agreement imposing the obligation.

In this article, we will cover simply those obligations of disclosure related to site selection and site issues under Item 11. The remaining Item 11 disclosures will be discussed in future articles.

Site Selection:

With respect to the pre-opening obligations of the franchisor related to site selection, the franchisor is required to disclose the franchisor’s pre-opening obligations to the franchisee, including any assistance in:

(1) Locating a site and negotiating the purchase or lease of the site. And, if such assistance is provided, the franchisor must disclose:

(A) Whether the franchisor generally owns the premises and leases it to the franchisee.

(B) Whether the franchisor selects the site or approves an area in which the franchisee selects a site. If so, state further whether and how the franchisor must approve a franchisee-selected site.

(C) The factors that the franchisor considers in selecting or approving sites(for example, general location and neighborhood, traffic patterns, parking, size, physical characteristics of existing buildings, and lease terms).

(D) The time limit for the franchisor to locate or approve or disapprove the site and the consequences if the franchisor and franchisee cannot agree on a site.

Other Site Issues:

The franchisor is also required to disclose the franchisor’s pre-opening obligations to the franchisee, including any assistance in:

(1) Conforming the premises to local ordinances and building codes and obtaining any required permits; and,

(2) Constructing, remodeling, or decorating the premises.

(3) Providing for necessary equipment, signs, fixtures, opening inventory, and supplies. If any such assistance is provided, the franchisor must state:

(A) Whether the franchisor provides these items directly or only provides the names of approved suppliers.

(B) Whether the franchisor provides written specifications for these items.

(C) Whether the franchisor delivers or installs these items.

Under Item 11, the franchisor must also disclose the typical length of time between the earlier of the signing of the franchise agreement or the first payment of consideration for the franchise and the opening of the franchisee’s business.

The franchisor must describe the factors that may affect the time period, such as ability to obtain a lease, financing, or building permits, zoning and local ordinances, weather conditions, shortages, or delayed installation of equipment, fixtures, and signs.

From just a quick review, the list of what a franchisor is required to disclose under Item 11 relating to site selection and other site issues, one gets the distinct impression that this is a section of the FDD, and the accompanying franchise agreement, should be reviewed very carefully. You will note when you receive your FDD (if the franchisor has complied with the law), Item 11 will begin by stating in bold letters: ‘‘Except as listed below, [the franchisor] is not required to provide you with any assistance.’’ You should take this warning to heart when reviewing your documents, and consult an experienced franchise law attorney regarding any unanswered questions. If it is not spelled out in the FDD and Franchise Agreement, you will find it difficult, if not impossible, to legally bind the franchisor to providing any assistance, no matter what the “nice sales person” promised you, or told you as to what they have done in the past or intend to do in the future. Protect yourself: if there is something you want or expect the franchisor to do -- get it in writing!

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

202-686-2886 (ph)

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