Item 11 of the Franchise Disclosure Document
Within Item 11, the franchisor must disclose the type of assistance and training that the franchisor will provide to the franchisee, advertising requirements imposed on the franchisee, and the required computer and software systems that the franchisee will be required to purchase and utilize.
When it comes to selling a franchise, one of the most important steps in the sales process is the franchisee candidate’s evaluation of the Franchise Disclosure Document (FDD).
In addition to the important financial disclosures contained within the FDD, prospective franchisees also glean critical information about the assistance they can expect to receive from the franchisor when reviewing Item 11. These assistance-related disclosures can help franchisee candidates understand the time and effort they and the franchisor will be obligated to invest in the opening and operating of the franchised business while allowing the candidate to evaluate whether the franchise is the right fit for them.
Below, we’ll discuss the information franchisors must disclose in Item 11 about the assistance they provide to franchisees for pre-opening and ongoing support, advertising, computer systems and training.
What Information Must Be Included in Item 11?
The purpose of Item 11 is to help prospective franchisees understand the support the franchisor will provide to them when opening and running their franchised business. Because of that, the franchisor must disclose its principal assistance obligations related to pre-opening and ongoing support, advertising, computer systems and training within Item 11, as well as any related obligations of both the franchisor and franchisee.
Mandatory Statement of Assistance Limitations
Per the amended Franchise Rule, Item 11 must begin with the following statement in bold type: “Except as listed below, [the franchisor] is not required to provide you with any assistance.”
The purpose of this mandatory disclaimer is to alert franchisee candidates to the limitations on assistance franchisees are entitled to receive from the franchisor and to clear up any misconceptions a prospective franchisee might have about receiving support beyond the assistance disclosed in Item 11.
Pre-opening Assistance
Following the required statement about the franchisor’s limited assistance obligations, the first disclosure topic listed in Item 11 is related to the pre-opening assistance provided by the franchisor to the franchisee.
In this section, franchisors must disclose whether they provide assistance to franchisees for site selection and negotiation of the site’s purchase or lease; compliance with local building codes and ordinances, and obtaining relevant permits; construction, remodeling or decoration of the franchised location; hiring and training employees; and obtaining equipment, signs, fixtures, opening inventory and/or supplies.
Additionally, the amended Franchise Rule requires that franchisors provide specific additional details about several of the aforementioned disclosures.
Length of Time to Open the Business
According to the amended Franchise Rule, Item 11 must include a disclosure describing “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.” Franchisors must also include factors that could potentially affect the estimated opening period including financing, permits, weather conditions, zoning, construction delays and more.
Ongoing Assistance
Franchisors must disclose the continued assistance they will provide to the franchisee in Item 11. While the specific types of ongoing support will vary by industry, disclosures related to ongoing assistance must address a specific list of topics outlined in 16 CFR § 436.5(k), including but not limited to product development, training, hiring, establishing prices, administrative support, resolution of operating issues, bookkeeping and more.
Advertising Assistance
Within Item 11, franchisors must disclose the types of advertising assistance they are obligated to provide to the franchisee. This disclosure topic should include information about the media a franchisor may use to conduct advertising, media coverage areas, the source of advertising, and the amount of money a franchisor must spend (if any) on advertising within the area where a franchisee’s territory is located. The franchisor must also describe the conditions under which a franchisee may use their own advertising material.
Advertising Councils, Cooperatives and Funds
Franchisors must disclose whether an advertising council of franchisees exists to advise the franchisor on advertising policies. If so, the franchisor must disclose specific information about the council, including but not limited to how the council’s members are chosen, whether the council is an advisory body or has decision-making authority, and whether the franchisor has authority over the council in terms of its existence, changes or dissolution.
The franchisor must also disclose whether the franchisee is obligated to participate in an advertising cooperative or advertising fund. If so, the franchisor must provide specific information about each as required by the amended Franchise Rule, including but not limited to information about contributions, administrators and more.
Multiple Brands
If a franchisor offers more than one trademarked or branded franchise, it’s recommended that each brand be separated into separate sections within Item 11 when disclosing advertising information. In situations where this is not pragmatic, franchisors may combine advertising fund disclosures across brands provided the disclosure clearly states the advertising funds are aggregated across the franchisor’s brands.
Allocation of Expenses
In situations where a franchisor does not spend all advertising funds within the same fiscal year they were obtained, franchisors must disclose how those funds are allocated and whether franchisees will receive periodic accounting of advertising funds. Franchisors are also required to disclose the use of advertising funds in the last fiscal year, in addition to disclosing other important information about the allocation of production and administrative expenses. Because financial disclosures related to franchise advertising can be complex, it’s important to work with an experienced franchise attorney while preparing Item 11 of the FDD.
Computer Systems Assistance
Within Item 11, franchisors must disclose the requirements imposed on franchisees related to the purchase and use of computer systems or electronic cash registers, including software and hardware. In this section, franchisors must describe the cash register or computer system being used (if applicable); any obligations of the franchisor, its affiliates or third parties to provide maintenance services, upgrades, repairs, updates, etc.; the initial and ongoing costs associated with the computer systems including optional and/or obligatory maintenance, upgrades or support; franchisee obligations related to the purchase or lease and use of such computer systems; and whether the franchisor will have access to the data and information contained within those computer systems.
Operations Manual
Within Item 11, franchisors must disclose the table of contents of the most current version of the franchise operations manual, including a statement noting how many pages of the manual are dedicated to each subject as of the current date.
Training Programs
The final disclosure topic in Item 11 is the franchisor’s training programs as of the end of their last fiscal year, or a more recent date when applicable. Training disclosures in Item 11 must include specific information about each training program offered by the franchisor and must follow a specific format as described in the amended Franchise Rule.
Training Disclosure Format
Under the amended Franchise Rule, franchisor training program disclosures in Item 11 must be presented in tabular format. The title “TRAINING PROGRAM” must be placed above the table in bold, capital letters. The table should include four columns containing the following information:
Column 1: Subjects taught.
Column 2: Hours of classroom training for each subject.
Column 3: Hours of on-the-job training for each subject.
Column 4: Location of training for each subject.
Other legally required information about training assistance, including but not limited to who must attend training, whether completion of training is required, charges for training, information about the staff providing the training and more, should be disclosed after the table.
Optional Assistance
Some franchisors elect to make additional assistance available to franchisees beyond the terms of the franchise agreement. In those instances, franchisors should disclose optional assistance in a separate section that clearly identifies the assistance as optional and not required by the franchise agreement.
Other Considerations
Franchisors should keep in mind that 16 CFR § 436.5(k) requires specific additional details about many of the required disclosure topics in Item 11. To ensure that Item 11 of your FDD is legally compliant, always seek the advice of an experienced franchise attorney during its preparation.