Table No. 1 – Systemwide Outlet Summary
Table No. 1 of Item 20 presents the total number of all outlets nationwide – both company owned and franchised – operating at the beginning and at the end of each of the franchisor’s last three fiscal years. This chart should include all outlets that are substantially similar to those being offered for sale to prospective franchisees. The table is intended to show the net change – positive or negative – in the number of operating franchised and company-owned outlets over time.
Sample Item 20: Outlets and Franchisee Information (Table No. 1)
(Column 1) Outlet Type (Column 2) Year (Column 3) Outlets at the Start of the Year (Column 4) Outlets at the End of the Year (Column 5) Net Change Franchised 2005 859 1062 +203 Franchised 2006 1062 1296 +234 Franchised 2007 1296 2720 +1,424 Company Owned 2005 125 145 +20 Company Owned 2006 145 76 -69 Company Owned 2007 76 141 +65 Total Outlets 2005 125 145 +20 Total Outlets 2006 1207 1372 +165 Total Outlets 2007 1372 2861 +1,489
Sample Item 20: Outlets and Franchisee Information (Table No. 2)
Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor) for years 2005 to 2007
(Column 1) State (Column 2) Year (Column 3) Number of Transfers NC 2005 1 NC 2006 0 NC 2007 2 SC 2005 0 SC 2006 0 SC 2007 2 Total 2005 1 Total 2006 0 Total 2007 4
Table No. 3 – Summary of Status of Franchisee-Owned Outlets
Table No. 3 of Item 20 shows changes in the status of franchisee-owned outlets in each state over the last three fiscal years. It begins with a baseline, using the number of franchise outlets at the start of the fiscal year. Added to the baseline are any new franchise outlets opened during that fiscal year and any existing company-owned outlets that are sold to a franchisee. Subtracted from the baseline are any outlets that changed ownership for one of four reasons – termination, non-renewal, reacquisition by the franchisor, or cessation of operations/other reasons. Finally, Table No. 3 shows the outlets remaining at the end of the year.
Multiple Owners
During the course of a single fiscal year, multiple changes in an outlet’s ownership may occur. For example, on February 1, 2006, a franchisor may reacquire an outlet from a franchisee and then resell it on March 1, 2006, to a new franchisee-owner. Subsequently, on December 1, 2006, the new franchisee-owner may cease operations. The last of such a series of events should be reported in Table 3 in the “ceased operations” column, because that was the last change in ownership for that specific franchise outlet during the fiscal year. However, for clarity and full disclosure, the amended Rule requires a footnote in this table describing such multiple events involving multiple owners, and the order in which they occurred. For an example, see the note in sample table 3 below.
Sample Item 20: Outlets and Franchisee Information (Table No. 3)
Status of Franchise Outlets For years 2005 to 2007
(Col. 1) State (Col. 2) Year (Col. 3) Outlets at Start of Year (Col. 4) Outlets Opened (Col. 5) Terminations (Col. 6) Non- Renewals (Col. 7) Reacquired by Franchisor (Col. 8) Ceased Operations- Other Reasons (Col. 9) Outlets at End of Year AL 2005 10 2 1 0 0 1 10 AL 2006 11 5 0 1 0 0 15 AL 2007 15 4 1 0 1 2 15 2005 20 5 0 0 0 0 25 2006 25 4 1 0 0 2 26 TX (Note 1) 2007 26 4 0 0 0 0 30 Totals 2005 30 7 1 0 0 1 35 Totals 2006 36 9 1 1 0 2 41 Totals 2007 41 8 1 0 1 2 45 Notes
(1) One outlet had several changes of ownership during the fiscal year. On February 1, 2006, Belmont reacquired a Texas outlet from its owner-franchisee and then resold it on March 1, 2006, to a new franchisee-owner. On December 1, 2006, however, the new franchisee-owner ceased operations.
Table No. 4 – Summary of Status of Company-Owned Outlets
Table No. 4 of Item 20 shows changes in the status of company-owned outlets in each state over the last three fiscal years. It also begins with a baseline, using the number of company- owned outlets at the start of the fiscal year. Added to the baseline are any new company-owned outlets opened during that fiscal year and any outlets reacquired from franchisees during the year. Subtracted from the baseline are any outlets that were closed, sold to a franchisee, or otherwise ceased to operate under the franchisor’s trademark. The resulting number reflects the companyowned outlets remaining at the end of the year.
(Col. 1) State (Col. 2) Year (Col. 3) Outlets at Start of Year (Col. 4) Outlets Opened (Col. 5) Outlets Reacquired From Franchisees (Col. 6) Outlets Closed (Col. 7) Outlets Sold to Franchisees (Col. 8) Outlets at End of Year NY 2005 1 0 1 0 0 2 NY 2006 2 2 0 1 0 3 NY 2007 3 0 0 3 0 0 OR 2005 4 0 1 0 0 5 OR 2006 5 0 0 2 0 3 OR 2007 3 0 0 0 1 2 Totals 2005 5 0 2 0 0 7 Totals 2006 7 2 0 3 0 6 Totals 2007 6 0 0 3 1 2
Table No. 5 – Projected New Outlets (Both Franchised and Company-Owned)
Table No. 5 of Item 20 addresses two issues: franchise agreements signed but outlets not opened, and projected new franchised and company-owned outlets.
Outlets Signed but Not Opened
The amended Rule requires franchisors to report, for each state, the total number of franchise agreements that were signed, but where the outlet had not opened as of the end of the last fiscal year. For example, a franchisor may have signed six agreements with franchisees in California over the last three years. Of the six agreements, four have yet to be opened. Accordingly, the franchisor would report that in California four agreements have been signed but none of the four outlets has opened.
Projected Franchised and Company-Owned Outlets
In addition, Item 20 requires franchisors to report, state by state, the projected number of new franchised and company-owned outlets for the next fiscal year. The amended Rule does not provide specific instructions on how to make these projections. However, such projections must have a reasonable basis. A franchisor may consider historical market trends as well as its own track record.
Sample Item 20: Outlets and Franchisee Information (Table No. 5)
Projected Openings As of December 31, 2007
(Column 1) State (Column 2) Franchise Agreements Signed But Outlet Not Opened (Column 3) Projected New Franchised Outlet in the Next Fiscal Year (Column 4) Projected New Company-Owned Outlets in the Next Fiscal Year CO 2 3 1 NM 0 4 2 Total 2 7 3
Contact Information for Current Franchisees
Item 20 of the amended Rule follows the approach of the UFOC Guidelines in requiring disclosure of contact information for current franchisees. Franchisors may provide contact information for all current franchisees, or for all franchisees in the state where they are offering to sell franchises, if there are 100 or more franchises in the state. If not, contact information must be provided for franchisees in contiguous states, and then the next closest states, until contact information for at least 100 franchised outlets can be listed. If a franchisor has fewer than 100 current franchisees, contact information must be provided for all of them.
To protect franchisee privacy, only the name of the franchisee and the address, and telephone number of his or her outlet must be disclosed. In the case of a franchise that may be operated from the franchisee’s home, such as an Internet franchise, franchisors may substitute a post office box or current email address for the home address for the same reasons. In that situation, franchisors should list only the telephone number of the franchisee’s business, if there is a separate line for the business. If not, a listing of a valid email address will suffice.
Contact Information for Former Franchisees
Like the UFOC Guidelines, Item 20 of the amended Rule requires the disclosure of contact information for every franchisees who:
- has had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year; or
- has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.
In order to protect the privacy of former franchisees, the amended Rule calls for the disclosure of only limited contact information. Specifically, franchisors should disclose only the name, city and state, and current business telephone number of a former franchisee. Only if the current business telephone number is unknown should the last known home telephone number of former franchisees be disclosed. Before disclosing the former franchisee’s home telephone number, however, franchisors should first attempt to disclose any current business telephone number for the former franchisee. This is true even if the franchisee no longer conducts a business of the type operated as a franchisee. For example, a former restaurant franchisee may have become a real estate agent. In such a case, the franchisor should attempt to include the real estate office telephone number. If no current business telephone number exists – such as may be the case when a franchisee retires – then the franchisor may include the last known home telephone number for the franchisee.
If a former franchisee requests that alternative contact information be disclosed – such as an email address, post office address, or personal home address – then it is not a violation of the Franchise Rule for a franchisor to honor the such a request by substituting the contact information provided for the former franchisee’s current business telephone number or last known home telephone number.
Finally, to ensure that prospective franchisees are aware that contact information will be disclosed once they leave the system, franchisors must include the following statement, verbatim, in the Item 20 disclosure of former franchisees: “If you buy this franchise, your contract information may be disclosed to other buyers when you leave the franchise system.”
Sample Item 20: Outlets and Franchisee Information (Former Franchisee Contact Information)
Former Franchisee Contact Information
During the last fiscal year, several Belmont Mufflers franchisees have left the system.
Two Belmont Muffler franchisees voluntarily ceased to conduct business:
John Smith, Denver, Colorado. Paul Berg, Austin, Texas
Current business telephone number: (222) 111-1111
Last know home telephone number: (111) 000-0000.
One Belmont Mufflers franchisee did not renew: Alice Harris Atlanta, Georgia [email protected]
One additional Belmont Mufflers franchisee has not communicated with Belmont Mufflers during the period 10 weeks.
Mary Peterson Madison, W isconsin Last known home telephone number: (123) 222-2222.
If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.
Previous Owner Information
The amended Rule requires franchisors to provide certain information if they are selling a specific outlet under their control that was previously owned by a franchisee. Franchisors are not required to make this disclosure, however, if they do not currently own and offer such an outlet for sale. A franchisor also is not obligated to make this disclosure if it assists a current franchisee in selling his or her outlet. Nor does a franchisor have an obligation to make this disclosure if it is selling a unit that has always been a company-owned outlet.
If the franchisor is selling a previously-owned franchised outlet now under its control, it must disclose the following information for the last five fiscal years:
- The name, city and state, current business telephone number, or if unknown, last
- known home telephone number of each previous owner of the outlet;
- The time period when each previous owner controlled the outlet;
- The reason for each previous ownership change; and
- The time period(s) when the franchisor retained control of the outlet.
If multiple units with previous franchisee-ownership are being sold, the franchisor must provide the required information separately for each one.
The amended Rule gives franchisors the flexibility to include this required information either in the text of Item 20 or in an addendum to the disclosure document. It is possible that a franchisor may not intend to offer a specific unit at the time disclosure is made to a particular prospective franchisee, or that a specific unit may become available only after a disclosure is made. In that case, franchisors need not redistribute revised disclosure documents. Rather, franchisors can comply with this requirement by providing the information in a supplement. Because it is deemed part of the disclosure document, the supplement must be given to the prospective franchisee at least 14 days before the signing of the franchise agreement or payment of any fees – the fundamental disclosure obligation of the amended Rule.
If the sample Item 20 disclosure below were made instead in a supplement, the supplement would be titled: “Supplement to the April 15, 2008, Belmont Disclosure Document.”
Sample Item 20: Outlets and Franchisee Information (Previous Owner Information)
Previous Owner Information
We are offering for sale the Belmont Mufflers unit at:
171 Delfi Street Arlington, VA 12345
Within the last five years, this specific unit was owned by two franchisees.
January 1, 2002 – March 15, 2003:
Thomas A. Fields 23 Newhampton Circle Arlington, VA 12345 Current business telephone number: (124) 444-4444 Mr. Fields voluntarily terminated the franchise in order to pursue other interests.
March 16, 2003 – June 5, 2004:
On March 16, 2001, Belmont Mufflers reacquired the unit and operated it as a company-owned outlet until June 5, 2004.
June 6, 2004 – October 20, 2007:
Susan Wadsworth 86 Bratock Road Arlington, VA 12345 Last known home telephone number: (124) 555-5555. Ms. Wadsworth was terminated on October 20, 2007, for failure to pay royalties.
October 21, 2007 – to date:
On October 21, 2006, Belmont Mufflers reacquired the unit and continues to operate it as a company-owned unit.
Confidentiality Agreements
In some instances, the amended Rule requires franchisors to disclose if franchisees have signed a confidentiality agreement with the franchisor during the last three fiscal years. If so, franchisors must include the following prescribed statement, verbatim, in Item 20:
In some instances, current and former franchisees sign provisions restricting their ability to speak only about their experience with [name of franchise system]. You may wish to speak with current and former franchisees, but be aware that not all such franchisees will be able to communicate with you.
What Constitutes a “Confidentiality Agreement”?
The term “confidentiality agreement” encompasses “any contract, order, or settlement provision that directly or indirectly restricts a current or former franchisee from discussing his or her personal experience as a franchisee in the franchisor’s system with any prospective franchisee.” A confidentiality agreement typically arises as part of the resolution of a dispute between the franchisor and franchisee.
The requirement to disclose confidentiality agreements is narrow. As noted, it specifically is limited to agreements that restrict a current or former franchisee from discussing his or her personal experience as a franchisee in the franchisor’s system. Thus, for example, if a franchisee is also employed by the franchisor as a manager, a confidentiality agreement prohibiting the franchisee from discussing her experience as a manager (as opposed to a franchisee) would not trigger this disclosure. Further, a confidentiality agreement that would bar a franchisee from speaking with individuals other than a prospective franchisee – such as competitors or trade press – would not trigger this disclosure obligation. This obligation would also not be triggered if a franchisee is restricted from discussing only the specific terms of a settlement, but is otherwise free to discuss his or her experience – including having a dispute with the franchisor.
What about Clauses Designed to Protect Trademarks or Other Proprietary Information?
The definition of “confidentiality agreement” expressly excludes clauses designed to protect franchisors’ trademarks or other proprietary information. Accordingly, a franchisor that requires prospective franchisees to sign a confidentiality agreement in order to receive or to review a copy of the franchisor’s operating manual would not trigger this disclosure requirement.
Optional Additional Disclosures
In addition to requiring the prescribed disclosure statement noted above, the amended Rule permits franchisors, if they wish, to provide additional information that will help a prospective franchisee understand the franchisor’s use of confidentiality clauses. Specifically, franchisors may note the number and percentage of current and former franchisees who, during each of the last three fiscal years, signed agreements containing confidentiality clauses, as well as the circumstances under which such clauses were signed.
Sample Item 20: Outlets and Franchisee Information (Confidentiality Agreement Disclosure)
Previous Owner Information
We are offering for sale the Belmont Mufflers unit at:
171 Delfi Street Arlington, VA 12345
Within the last five years, this specific unit was owned by two franchisees.
January 1, 2002 – March 15, 2003:
Thomas A. Fields 23 Newhampton Circle Arlington, VA 12345 Current business telephone number: (124) 444-4444 Mr. Fields voluntarily terminated the franchise in order to pursue other interests.
March 16, 2003 – June 5, 2004:
On March 16, 2001, Belmont Mufflers reacquired the unit and operated it as a company-owned outlet until June 5, 2004.
June 6, 2004 – October 20, 2007:
Susan Wadsworth 86 Bratock Road Arlington, VA 12345 Last known home telephone number: (124) 555-5555. Ms. Wadsworth was terminated on October 20, 2007, for failure to pay royalties.
October 21, 2007 – to date:
On October 21, 2006, Belmont Mufflers reacquired the unit and continues to operate it as a company-owned unit.
Confidentiality Agreements
In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with Belmont. You may wish to speak with current and former franchisees, but be aware that not all such franchisees will be able to communicate with you. During the last year, Belmont entered into two agreements with franchisees that contained confidentiality restrictions (2 out of 100 franchisees, or 2% of our franchisees). In both instances, the confidentiality restrictions were signed as part of mutually agreed upon settlements of litigation.
Franchisee Associations
The amended Rule requires franchisors to disclosure contact information for trademarkspecific franchisee associations. This disclosure requirement pertains solely to associations of franchisees of the franchise brand being offered for sale. It does not pertain to associations of franchisees whose membership is opened to franchisees of many franchise systems, such as “The Texas Association of Restaurant Franchisees.” Nor does it pertain to associations of franchisees under a brand owned by the franchisor that is not the subject of the franchise offering. For example, Belmont Mufflers’ disclosure document need not disclose the existence of a “Belmont Tires” or a “Belmont Windshields” franchisee association.
To be considered a “trademark-specific association,” the association need not include a reference to the trademark in its name. For example, Belmont Mufflers may wish to call its association of muffler franchisees: “Muffler Franchisees of the U.S.” As long as members of the association are franchisees conducting business under the brand being offered in the disclosure document, the association will be deemed a “trademark-specific” franchisee association.
The amended Rule’s disclosure requirements pertaining to franchisee associations differ depending on whether the franchisee association is created, sponsored, or endorsed by the franchisor, or whether the trademark-specific franchisee association is independent of the franchisor.
Associations Created, Sponsored, or Endorsed by the Franchisor If the franchisor creates, sponsors, or endorses a trademark-specific franchisee association, it must disclose in Item 20 the name, address, telephone number, email address, and Web address of the association. It also must disclose the specific relationship between the franchisor and the association (i.e., that it was created, sponsored, or endorsed by the franchisor).
Note that franchisor sponsorship or endorsement is enough to trigger this disclosure requirement; the franchisor need not have established the association. A franchisor will be deemed to “sponsor” an association if it contributes to the association financially, or provides tangible benefits such as office space, equipment, or personnel. A franchisor will be deemed to “endorse” an association if takes affirmative steps to promote awareness of the association, its membership, or growth. For example, the franchisor may include a link to the association on its website or routinely report on the association’s activities in its newsletter. Merely recognizing the existence of the association – such as agreeing to meet with one or more of its members or referencing the existence of the association in an email – alone will not be deemed either sponsorship or an endorsement.
Independent Franchisee Associations
The amended Rule requires franchisors to disclose contact information for independent trademark-specific franchisee associations under limited circumstances. An “independent” franchisee association is one that was not created by the franchisor, and is neither sponsored nor endorsed by the franchisor. Typically, such an association is organized and funded by franchisees for the benefit of the franchisees, often without any knowledge of the franchisor. Franchisors have no obligation to disclose contact information for independent franchisee associations unless each of the following criteria is satisfied:
- the association is organized under state law;
- the association expressly asks for inclusion in the disclosure document; and
- the association timely renews its request for inclusion on an annual basis.
Franchisors obligated to disclose one or more independent franchisee associations may include an optional prescribed statement in their disclosure document noting that the association is an independent one:
The following independent franchisee organizations have asked to be included in this disclosure document:
“Organized under State Law”
To be considered for inclusion in a disclosure document, the independent association must be organized under state law. It need not be incorporated. For example, it can be organized as a trust. The “organized under state law” requirement is interpreted very broadly. However, informal get-togethers by franchisees will not satisfy the “organization under state law” criteria. This will be true even if the informal group of franchisees publishes a newsletter or maintains a website.
Request for Inclusion
A franchisor has no obligation to disclose contact information for an organized independent association unless the association has asked to be included in the franchisor’s disclosure document for the next fiscal year. To be included in the disclosure document, the association must request inclusion no later than 60 days after the close of the franchisor’s fiscal year. Therefore, as an example, if Belmont Mufflers uses the calendar fiscal year, any independent association of Belmont Mufflers franchisees must make their request for inclusion in the Belmont Mufflers disclosure document on or before March 1st of the next year (assuming a non-leap year).
Annual Renewal
Once a valid request is made for inclusion in a disclosure document by an independent association, the franchisor must include the required contact information for the entire fiscal year. The franchisor need not verify the continued existence of the association during the course of the year. However, if the franchisor has knowledge that the association has ceased to exist, it can always add a footnote to the disclosure document alerting prospective franchisees of the change in status of the independent group. Similarly, the franchisor has no obligation to discover the existence of any new independent associations during the course of the fiscal year. In short, this disclosure is required on an annual basis only and need not be updated quarterly.
Sample Item 20: Outlets and Franchisee Information (Franchisee Association Disclosure)
Franchisee Associations
Belmont Mufflers, Inc., created and supports the Belmont Mufflers Franchisee Association:
1234 Second Street Jackson, MN 55000. (612) xxx-xxxx. [email protected] www.bmfa.org
The following independent franchisee organization has asked to be included in this disclosure document:
Muffler Franchisees of North America, Inc. 2222 Third Street Albany, NY 11111 (222) 777-8888 [email protected] www.Mufler.org
