FDD Item 17: Understanding Renewal, Transfer, Termination, and Dispute Resolution in the Franchise Disclosure Document
Understanding your rights and responsibilities as a new franchisee, from marketing practices to dispute resolution, is necessary for a successful and positive business experience across various types of franchising.
Knowing the detailed terms of the franchise agreement should be your top priority before signing on the dotted line and handing over your initial investment.
That’s where the Franchise Disclosure Document (FDD) comes in. It’s a legal document that can help you understand the franchisor’s obligations to you and avoid situations like an unexpected termination or costly advertising fees.
This article discusses Item 17 of the FDD—a critical piece for franchisors and prospective franchisees, as it outlines the contractual provisions related to the franchise's renewal, termination, or transfer and what to do if any legal disputes arise.
What Information Does Item 17 Disclose?
Each component of Item 17 clarifies the franchisor and franchisee obligations in the franchise agreement. It sets clear expectations and protocols for various situations that may occur during the course of franchise business.
Below is an outline of the disclosure items in Item 17 of the FDD.
Length of the Agreement
This details the initial term of your contract with the franchisor. It's essentially the lifespan of your agreement. It specifies how long you can operate under the franchise system before renewing your franchise agreement. Understanding this helps with planning long-term business goals and financial forecasting.
Termination
This critical section outlines the dos and don'ts to avoid losing your business. It describes what actions or failures can lead to the franchisor terminating the agreement. These can include not following the brand's operational guidelines, failing to meet sales targets, or breaching contract terms.
Renewal
This part explains the conditions under which you can renew your franchise agreement once the initial term expires. It often involves meeting specific performance criteria, agreeing to any updates in the franchise terms, and sometimes, paying a renewal fee. It might also detail required refurbishments or upgrades to the franchise premises to align with brand standards.
Transfer
This section outlines the process and conditions you must meet to transfer ownership if you decide to sell your franchise. This might include the franchisor's right to first refusal, buyer approval, transfer fees, and ensuring the new owner completes the franchisor's training program.
Dispute Resolution
This section describes the agreed-upon process for resolving conflicts between you and the franchisor. It can range from mediation and arbitration to litigation, specifying the jurisdiction and applicable laws. Understanding how to handle disputes is critical and can influence your decision whether to enter the franchise agreement or not.
Opening a Similar Business
This clause details any restrictions for opening a similar business outside the franchise system. It typically includes non-compete clauses that remain in effect during and sometimes after the agreement period, preventing you from opening a competing business within a particular geographic area or time frame.
Inability to Operate the Franchise
If you cannot run your franchise due to illness or other significant reasons, this section provides the protocol for transferring, selling, or managing the franchise in your absence. It ensures there's an exit plan for unforeseen personal circumstances that impact your ability to manage the franchise.
How Is Item 17 Formatted?
The Code of Federal Regulations (CFR) stipulates that franchisors must illustrate Item 17 in a table format. At the top of the page, you will see the title "THE FRANCHISE RELATIONSHIP" written in bold and capitalized letters. This sets the tone for what you will read next.
Directly underneath, another bold statement emphasizes the importance of the table you are about to see. This table outlines the critical components of the franchise agreement and any related contracts. Be sure to pay close attention to it.
Although the Federal Trade Commission’s (FTC) Franchise Rule doesn’t dictate exactly how each column must be named, there's a commonly accepted practice that makes the table clear and helpful.
These tables include the following:
Column 1: Provision—This column lists 24 specific topics related to the scope of the franchise relationship. They are sorted alphabetically and cover everything from the duration of the franchise term to how to resolve disputes with the franchisor.
Column 2: Section in franchise or other agreement—For each topic listed in Column 1, there's a pointer to where in the franchise agreement (or any other relevant contract) you can find the detailed rules.
Column 3: Summary—This column further breaks down each topic, giving you a quick summary of what each provision means. It's a straightforward way to grasp the essentials without getting bogged down in legal jargon.
If a topic doesn't apply to your franchise outlet, the table will indicate this with a "Not applicable" note. This ensures that you only focus on what's relevant to your franchise.
Additional Insights
Sometimes, the franchisor might offer certain benefits or protections not explicitly required by your agreement, but as part of their policy. If this is true, you'll find a footnote in Item 17 explaining these extras and whether they might change. This is an excellent place to look for additional perks or policies that could impact your decision to invest in a franchise opportunity.
Why It Matters
Understanding Item 17 is important because it provides the framework for your franchise relationship. This knowledge enables you to make well-informed decisions and manage your franchise effectively.
It’s like an operating manual that clearly outlines your rights, responsibilities, and mechanisms for handling various situations that might arise during your franchise experience.
However, navigating each section of the FDD can be overwhelming. There’s a lot to learn and understand, such as tricky financial statements and balance sheets in Item 21 and franchise offerings related to leases and purchase agreements.
Having someone in your corner who understands franchise law can help take the pressure off while researching a potential new or established franchise for sale.