Item 11 in the FDD: What Are the Franchisor Obligations?
Starting a franchise is exciting, but there’s a lot to learn and process before handing over your initial investment.
Thanks to the Federal Trade Commission (FTC) Franchise Rule, franchisors must disclose everything about their franchise system, from start-up costs to financial statements, balance sheets, training programs, and even computer systems you may need to buy.
For good reason, the Franchise Disclosure Document (FDD) is a hefty document.
Each section is referred to as an “Item” and covers a different aspect of the franchise. For example, Item 8 covers restrictions on sources of products and services, and Item 19 provides an overview of the financial performance representations.
Item 11 of the FDD is critical for prospective franchisees because it provides detailed information about the franchisor's obligations—the amount of assistance and support they provide to help you succeed in your new business experience.
What Are the Requirements for Item 11 of the FDD?
The FTC predetermines the requirements for each section of the FDD. Item 11's purpose is to help prospective franchisees know precisely what kind of pre- and post-opening support their franchisor offers.
Specifically, Item 11 covers the following five areas:
- Assistance: This outlines the scope and limits of support you can expect to receive once your franchised business is operational
- Advertising: This section clarifies how to manage brand promotion and what franchisees are financially responsible for
- Computer systems: This part details any proprietary software, hardware specifications, costs associated with purchasing or leasing equipment, and ongoing support or updates provided by the franchisor
- Training: The franchisor should outline the training program objectives to ensure you and your employees are sufficiently prepared to operate the franchise according to the brand's standards
- Operating manuals: These documents provide detailed instructions on the daily operations of the franchise, including brand standards, employee training procedures, customer service guidelines, and quality control measures
Pre-Opening Obligations
Although the pre-opening franchisee obligations can vary depending on the franchise system, they generally include a range of franchisor assistance and services designed to prepare you to open your new franchise.
These obligations of the franchisor typically cover:
- Help selecting a suitable location for the franchise. This may include demographic studies, site approval processes, and assistance with negotiating leases.
- Specifications for the design and layout of the franchise location, including architectural and branding guidelines
- Comprehensive training for the new franchisee and their management staff
- Help with purchasing or leasing the necessary equipment and inventory, especially if franchisees are required to buy or lease from approved suppliers to ensure quality and consistency
- Franchisors typically provide marketing materials and strategies for a grand opening
- Detailed operational manuals to ensure consistency across the brand
- Help understanding and complying with relevant local, state, and federal regulations that affect the business, like health and safety and employment laws
These pre-opening obligations exist to help you succeed and ensure you’re fully prepared to operate your franchise efficiently per the franchise agreement and the franchisor's brand standards and expectations.
Post-Opening Assistance (Ongoing/Continuing)
While franchisors aren’t obligated to provide post-opening assistance, if they do, the FTC Franchise Rule requires that they clearly outline the support they offer.
The franchisor can omit any of the following from the Franchise Disclosure Document if they aren’t part of the post-opening assistance they provide:
- Training on new products or services
- Resources and programs to recruit skilled employees and provide continuous education and training
- Strategic guidance and support for business growth and development, such as planning advice, marketing strategies, and operational improvements
- Guidance on local pricing decisions to keep prices competitive and profitable
- Bookkeeping, accounting, and inventory management systems, along with training on how to use them
- Assistance troubleshooting and resolving operational challenges as they arise
By offering post-opening assistance, franchisors can give franchisees the guidance, resources, and support they need to maintain the brand's integrity and build a profitable franchise business.
These post-opening obligations demonstrate a franchisor's commitment to a collaborative franchise relationship. They emphasize that a franchisor has promised to provide support throughout the franchise agreement's life cycle.
Length of Time to Open Franchise
The typical length of time it takes from signing the franchise agreement to opening the doors to customers can vary widely across franchises. Factors that influence this timeline include:
- Site selection
- Lease negotiations
- Construction and remodeling
- Obtaining permits and licenses
- Training
- Setting up operational systems
Franchisors should provide a realistic estimate of this period based on their experience with other franchisees. This preparation phase is essential for a smooth launch and actual operation of the franchise business.
Advertising Obligations
As with most new businesses, advertising is key to attracting new customers. But what are your responsibilities as a new franchisee, and what level of support can you expect from your new franchisor?
It makes sense for the franchisor to support your marketing efforts. However, they will most likely have advertising guidelines you must follow to maintain the brand integrity.
Item 11 of the FDD answers these questions and policies.
Contribution to Advertising Funds
Franchisees are generally required to allocate a portion of sales to a national or regional advertising fund. The franchisor manages this fund for wide-reaching marketing campaigns such as online advertising, television and radio commercials, print ads, and social media promotions.
Local Advertising Requirements
In addition to contributing to a collective advertising fund, franchisees are often required to invest in local marketing efforts. This ensures the franchise brand gets broad exposure and engages directly with the local community. Item 11 outlines the minimum amount a franchisee should allocate for local advertising, approved marketing channels, and any franchisor guidelines that must be followed to maintain brand consistency.
Use of Proprietary Advertising Materials
Franchisors typically offer branded marketing assets for local advertising. These may include templates for print ads, social media content, email marketing campaigns, and promotional flyers. Item 11 specifies the extent to which franchisees can customize these assets and the approval process for locally created advertising content. This helps maintain the brand's identity and messaging standards.
Advertising Councils and Cooperatives
Some franchise outlets create advertising councils or cooperatives that include franchise owners. These groups provide input on advertising strategies, budget allocations, and campaign effectiveness. Item 11 details the structure of these councils, franchisee participation requirements, and how decisions made by these groups influence overall advertising efforts.
Franchisor Support and Oversight
Item 11 also highlights the support franchisees can expect from the franchisor in executing advertising initiatives. This support might include access to preferred vendors, market research data, training on digital marketing tools, and ongoing guidance on best practices for local market engagement.
By providing an in-depth look at these advertising obligations, Item 11 equips prospective franchisees with the knowledge to market their new business effectively.
What to Look for as a Potential Franchisee
When exploring franchise opportunities, it's important to research and note how well the franchisor supports its franchisees.
Look for clear, detailed explanations of the assistance provided before and after you open for business.
This includes the extent of training, marketing support, technology systems, and ongoing operational guidance. A franchisor that invests in comprehensive support systems demonstrates a commitment to your success.
Working with a professional who understands the nuances of the franchising industry can help you interpret the franchise offering and gain insights into its day-to-day operations and potential profitability. Visit the BizBuySell Broker Directory to search for a franchise broker or consultant who can help guide you through the process of starting a franchise or buying a franchise resale.