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Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
Consistent with the UFOC Guidelines, Item 11 of the amended Rule requires the disclosure of the franchisor’s obligations under the franchise agreement to furnish assistance to franchisees. The disclosure requirements encompass pre-opening assistance (e.g., site selection), as well as any ongoing assistance, such as advertising and training, during the operation of the franchise.
Another specific topic that must be covered under Item 11 is any mandatory computer or software purchases and related costs that a franchisee will incur. In this regard, and as discussed below, the amended Rule’s Item 11 requires less detailed disclosures about computer system requirements than did the corresponding item in the UFOC Guidelines. The amended Rule’s Item 11 also follows the UFOC Guidelines in requiring either disclosure of the franchisor’s operating manual table of contents or access to the operating manual itself.
For each assistance obligation disclosed in Item 11, franchisors must include a citation to the specific section number of the franchisee agreement that imposes the obligation on the franchisor.
Required Statement about the Limited Extent of the Franchisor’s Obligation to Furnish Assistance
Under the amended Rule, franchisors must begin their Item 11 disclosure with the following prescribed statement, in bold type:
Except as listed below, [the franchisor] is not required to provide you with any assistance.
This warning is intended to alert prospective franchisees, and to counter any misrepresentations to the contrary. It also serves to dispel any misconception on the prospective franchisee’s part that a minimum degree of assistance is inherent in any franchise offer.
After the standard statement about the franchisor’s limited obligations to furnish assistance, the first disclosure topic under Item 11 is the franchisor’s pre-opening obligations to the franchisee, including any site location assistance, such as, for example, negotiation of the purchase or lease of the site, site approval requirements, and the typical length of time it takes to open a franchise.
Following disclosure of the franchisor’s pre-opening assistance obligations, Item 11 requires disclosure of the franchisor’s obligation to provide continuing assistance to the franchisee after the franchise is opened. Many different kinds of assistance must be disclosed, although the specifics will vary depending on the type of franchise. Except as listed below, [the franchisor] is not required to provide you with any assistance.
Some franchisors provide pre-opening assistance or ongoing assistance after the opening of a franchise that they are not obligated by the franchise agreement to provide. Such assistance may be included in the Item 11 disclosure, provided that it is set out separately and clearly identified as assistance that is not required by the franchise agreement.
One common and very important type of assistance is advertising. The information required to be disclosed regarding this type of assistance includes, for example:
- whether the franchisor is obligated to conduct advertising;
- the media used for any advertising (e.g., print, radio, television, or Internet);
- the source of the advertising;
- the geographical scope of the advertising (i.e., local, regional, or national); whether franchisees must contribute to an advertising fund or spend any specified amount on advertising in their local area; and
- the role of any advertising councils or cooperatives and how they operate.
For any advertising fund to which a franchisee must contribute, Item 11 requires franchisors to disclose who contributes to the fund, whether other franchisees and franchisorowned outlets contribute on the same basis, who administers the fund, whether the fund is audited, whether its financial statements are available for review, whether franchisees receive a periodic accounting of fund expenditures, and the percentage of the fund, if any, used principally to solicit new franchise sales.
Multiple Brand Advertising
If a franchisor offers more than one branded or trademarked franchise for sale, it should, as a general rule, segregate its disclosures for each brand. Nevertheless, it may be impractical or unreasonable for the franchisor to segregate advertising funds by brand. In such circumstances, a franchisor may aggregate its advertising fund disclosures across its brands, as long as the disclosure makes clear that the advertising funds are aggregated across brands.
Allocation of Production and Administrative Expenses
Item 11 requires franchisors to disclose the use of advertising funds in the last fiscal year, including percentages spent on production, media placement, administrative expenses, and other described expenses. A franchisor’s internal costs associated with advertising production (e.g., supplies, photography, and computer graphics) can be characterized as production expenses. The franchisor, however, must have a reasonable basis for claiming the allocation of production expenses at the time disclosure is made. Similarly, if an advertising fund pays all or part of the salaries of franchisor personnel who are involved in the advertising of the franchise system’s products or services, those costs – if reasonable – can be considered a production or administrative expense if the allocation is explained in the Item 11.
Like Item 11 of the UFOC Guidelines, the amended Rule’s Item 11 mandates disclosure of any requirements that franchisees purchase or use electronic cash registers or computer systems, including their hardware and software components. The amended Rule’s Item 11 disclosures on this topic, however, are narrower than those in the UFOC Guidelines. Item 11 of the UFOC Guidelines required franchisors to identify each component of hardware and software by brand, type, and principal function, or to identify compatible equivalents and whether they had been approved by the franchisor. By contrast, under the amended Rule, the franchisor need not identify each and every piece of hardware and software by brand, type, and principal function. Nor must the franchisor identify compatible equivalents and explain whether the franchisor has approved them. It is sufficient for franchisors to describe generally:
- the cash register or computer systems to be used, if any;
- any obligation of the franchisor, an affiliate, or third party to provide ongoing maintenance, repairs, upgrades, or updates;
- the cost of purchasing or leasing the system, and the annual cost of any optional or required maintenance, upgrades, or support contracts;
- any obligation of the franchisee to upgrade or update any such system, and any contractual limits on the frequency and cost of that obligation; and
- whether the franchisor will have access to information contained in those systems.
This information about required computer systems is designed to enable prospects to weigh the costs and benefits of purchasing a specific franchise. Further, it is designed to enable prospective franchisees to assess readily whether they may be at a technological advantage or disadvantage compared to franchisees of competing franchise systems. The amended Rule recognizes that start-up franchisors may be uncertain about which computer systems or software they will expect franchisees to use. Accordingly, Item 11 is flexible. In its Item 11 disclosures, a start-up franchisor may indicate that computer requirements are yet to be determined, if that is the case, or otherwise factually state its policy concerning computer usage. The fact that a start-up franchisor has not finalized its plans for electronic cash registers or computer systems is itself material information to disclose to prospective franchisees.
Item 11 requires franchisors to disclose the table of contents of the system’s operating manual that franchisees receive, and certain other information about the manual, as of the end of the franchisor’s last fiscal year or a more recent date. The table of contents of the operating manual can be included as one of the exhibits in Item 22 of the disclosure document.
The operating manual table of contents need not be disclosed if the franchisor offers the prospective franchisee the opportunity to review the operating manual itself before buying the franchise. It is important to note that merely asking a prospective franchisee to first sign a confidentiality agreement before permitting access to the operating manual will not trigger the disclosure requirement of the amended Rule. While the signing of a confidentiality agreement is “in connection with the proposed franchise sale,” it does not bind the prospective franchisee to purchase the franchise or to undertake other financial obligations, such as the signing of a lease. This assumes, however, that the confidentiality agreement contains no other agreements that, in the absence of the confidentiality agreement, would trigger the obligation to provide the disclosures required by the amended Rule.
Finally, Item 11 requires franchisors to disclose their training program as of the end of their last fiscal year or a more recent date. Some of the training disclosures must be summarized in a table titled, in bold, capital letters, “TRAINING PROGRAM.” The table must include a listing of the subject matter of the training, the hours of classroom training on each subject, hours of on-the-job training, and the location of the training. Other required information – such as who may and who must attend training, whether successful completion of training is required, the charges for the training, if any, who pays for any travel and living expenses, and whether additional training or refresher course are required – may be disclosed after the table.
The amended Rule’s Item 11 also calls for disclosure of information about the staff who provide the training. If the franchisor’s training staff is large or changes frequently, the franchisor can use a general description of the background and experience of the staff providing the training. Also, franchisors should disclose here (if not disclosed in Item 2) the corporate officer in charge of training, if any, along with information about his or her experience.
This article is part of a series of articles on starting a franchise in Minnesota.
CREDIT: The content of this post has been copied or adopted from the Federal Trade Commission’s Franchise Rule Compliance Guide.