Item 16 of the Franchise Disclosure Document
Within Item 16, the franchisor must disclose its control over what a franchisee may or may not sell as a part of the franchised business.
Making sure the products and services available at different locations throughout a franchise system are consistent is critical for the success of any franchise brand.
Because uniformity leads to a more positive and reliable experience for customers visiting different locations, franchisors need to convey their expectations about goods and services to franchisees as early as possible. During the franchise sales process, this information is usually communicated to prospective franchisees in Item 16 of the Franchise Disclosure Document (FDD).
In this article, we’ll review the information that must be disclosed in Item 16 to ensure that prospective franchisees know what they will be permitted to sell in their future franchised business.
What Information Must Be Disclosed in Item 16?
Under the federal Franchise Rule, franchisors must disclose “any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit access to customers.” According to 16 C.F.R §436.5(p), Item 16 disclosures must address the following:
Any obligation imposed on the franchisee to sell or offer only goods and services that are approved by the franchisor.
Any obligation imposed on the franchisee to sell or offer all goods and services authorized by the franchisor.
Whether the franchisor is permitted to alter the types of authorized goods or services. If so, the franchisor must state whether there are any limitations to its rights to make such changes.
Other Considerations
Because thoroughness and accurate verbiage are crucial when drafting Item 16 of the FDD, it’s always a good idea to consult with an experienced franchise attorney when developing or updating your FDD.
To learn more about franchisee restrictions on goods and services and how we can help you prepare or improve your Item 16 disclosures, call us at (800) 976-4904 or fill out our contact form.
