Item 1: The Franchisor And Any Parents, Predecessors, And Affiliates Item 1 of the amended Rule requires franchisors to disclose background information on the franchisor and any parents, predecessors, and affiliates. Unlike the UFOC Guidelines instructions for Item 1, the amended Rule does not expressly require a franchisor to refer to itself as “we,” or…
The overview that follows highlights key changes and provides sample disclosures for each item in the disclosure document required by the amended Rule. The Cover Page The disclosure document begins with a cover page that provides prospective franchiseeswith information about the franchise being offered for sale. The amended Rule updates theoriginal cover page to include…
Are you interested in starting a franchise in Minnesota? An important first step is understanding the FTC’s amended Franchise rule. Note: This series of posts covering the admended Franchise Rule does not modify the amended Rule. It explains the requirements of the amended Rule. Moreover, it does not exhaustively cover every requirement contained in the…
Sample General Media Financial Performance Representation Our Franchisees Earn $50,000 or More Per Year! Now, for a limited time in this area, Belmont Mufflers, Inc., is offering an opportunity for a self-motivated individual to join the ranks of independent entrepreneurs who have earned $50,000 a year.* Small investment needed. Seize the chance! ________________ * W…
Opportunity For Prospective Franchisees to Review The Franchise Agreement Except in limited circumstances, the amended Franchise Rule eliminates the original Rule’s requirement that prospective franchisees always have at least five business days in which to review the completed franchise agreement. Under the amended Rule, it is only if the franchisor has unilaterally and materially altered…
At What Point in The Sales Process Must a Franchisor Furnish The Disclosure Document? The amended Rule provides that franchisors must furnish prospective franchisees with a disclosure document at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with…
Who is Responsible For Furnishing Disclosure Documents? Franchisors (including any subfranchisors) are responsible for furnishing disclosure documents to each prospective franchisee. A “prospective franchisee” is “any person (including any agent, representative, or employee) who approaches or is approached by a franchise seller to discuss the possible establishment of a franchise relationship.” Accordingly, franchisors do not…
Disclosure Compliance Obligations The Rule specifies who must prepare the disclosures, who must furnish them to prospective franchisees, how franchisees receive the disclosures, and how long franchisees must have to review the disclosures and any revisions to the standard franchise agreement. Who is Responsible For Preparing Disclosure Documents? Franchisors are responsible for preparing disclosure documents….
Exclusions from the Amended Rule The following relationships are excluded from the amended Rule. Although each of these relationships may have some superficial similarities with a franchise relationship, none of them meet the definitional elements of the term “franchise,” and should not be confused with a franchise relationship. Employer-Employee Relationship Exclusion Bona fide employer-employee relationships…
The “Insiders” Exemption The amended Rule adds a new exemption for franchise sales to the officers, directors, general partners, managers (collectively “officers”), and owners of a franchisor. The prerequisites to qualify for this exemption differ depending upon whether the individual franchise purchaser is an officer, director, general partner, or manager, on the one hand, or…
Large Franchisee Exemption The amended Franchise Rule exempts franchise offers and sales to large entities – such as airports, hospitals, and universities – that have been in business for at least five years and have a net worth of at least $5 million. What Type of Business Experience Is Required? To qualify for the exemption,…
Large Franchise Investment Exemption The amended Rule exempts franchise offers and sales where the initial investment is atleast $1 million, excluding the cost of unimproved land and any franchisor (or affiliate)financing. In addition, the prospective franchisee must sign an acknowledgment that thefranchise sale is exempt from the Franchise Rule because the prospective franchisee will bemaking…
Oral Agreements The amended Rule exempts purely oral relationships that lack any written evidence of a material term of the franchise relationship or agreement, as a matter of policy, to avoid problems of proof in its enforcement. However, the exemption does not apply when there is any writing, even if unsigned, with respect to a…
Fractional Franchise Exemption The amended Rule exempts the sale of fractional franchises. A fractional franchise relationship is created when the following two elements are present at the start of the relationship: The franchisee, any of the franchisee’s current directors or officers, or any current directors or officers of a parent or affiliate, has more than…
Minimum Payment Exemption Exempt from the Franchise Rule are franchise sales where “the total of the required payments, or commitments to make a required payment, to the franchisor or an affiliate that are made any time from before to within six months after commencing operations of the franchisee’s business is less than $500.” A franchisee…
Definition of Franchising Franchising is a method of marketing and distributing goods and services. Franchises are offered and sold for many types of businesses, including services, retail trade, finance, real estate, transportation, and communications. A franchise is broadly defined as a contract or agreement between two or more persons by which the franchisor (the seller),…
What Types of Relationships Are Not Covered? As discussed in the Statement of Basis and Purpose, the amended Rule no longer covers the sale of business opportunity ventures. It also does not cover the sale of franchises to be located outside of the United States and its territories. Business Opportunities Disclosure requirements and prohibitions pertaining…
Regulatory Considerations The next several posts will cover: Securities Registration Federal Exemptions Minnesota Blue Sky Laws Isolated Sales and Limited Offerings SCOR (Small Corporate Offering Registration) Securities Registration Broadly defined, a security is an interest in, or an obligation of, the business entity that issues the security. Examples of securities are corporate stock, interests in…
ITEM 17: THE FRANCHISE RELATIONSHIP This table lists certain important provisions of the franchise and related agreements. You should read these provisions in the agreements attached to this disclosure document. Provision Section in franchise or other agreement Summary a. Length of the franchise term Section 1 (also Section 1 of Lease) Term is equal to…
Sample Integration Provision This Agreement and all exhibits to this Agreement constitute the entire agreement between the parties and supersede any and all prior negotiations, understandings, representations, and agreements. Nothing in this or in any related agreement, however, is intended to disclaim the representations we made in the franchise disclosure document that we furnished to…
ITEM 4: BANKRUPTCY On March 2, 2004, Belmont filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the District of Minnesota, 04-BR-3344. We continued to operate our business and manage our assets as a debtor-in-possession under bankruptcy court supervision. On October 2, 2005, the bankruptcy court confirmed our plan of…
ITEM 9: FRANCHISEE’S OBLIGATIONS This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this disclosure document. Obligation Section in agreement Disclosure document item a. Site selection and acquisition/lease Section 2A of franchise agreement…
Introduction Here is a sample cover page of a franchise disclosure document. Franchise Disclosure Document Belmont Mufflers, Inc. A Minnesota Corporation 111 First Street Jackson, Minnesota 55000 (111) 222-3333 franchiseofficer@belmont_mufflers4u.com www.belmont_mufflers4u.com Belmont Mufflers, Inc., repairs and installs motor vehicle exhaust systems. The total investment necessary to begin operation of a Belmont Mufflers franchise is $100,000….
Sample Item 5-1: Initial Fees ITEM 5: INITIAL FEES All Belmont Muffler Shops franchisees pay a $42,000 lump sum franchise fee when they sign the franchise agreement. Belmont will refund the entire amount to you if we do not approve your application within 45 days. Belmont will refund $9,000 of this fee if you do…
Sample Item 5-1: Initial Fees ITEM 5: INITIAL FEES All Belmont Muffler Shops franchisees pay a $42,000 lump sum franchise fee when they sign the franchise agreement. Belmont will refund the entire amount to you if we do not approve your application within 45 days. Belmont will refund $9,000 of this fee if you do…
Item 1: the Franchisor, Parents, Predecessors, and Affiliates To simplify the language, this disclosure document uses “we” or “us” to mean Belmont Mufflers, Inc., the franchisor. “You” means the individual, corporation, or other entity that buys a Belmont Muffler franchise. Franchisor, Parent, and Affiliates We conduct business under the name Belmont Muffler Shops. Our principal…
ITEM 6: OTHER FEES (Column 1) Type of fee (Column 2) Amount (Column 3) Due Date (Column 4) Remarks Advertising (note 1) 2% of total gross sales. Same as royalty fee Cooperative Advertising (note 1) Maximum – 2% of total gross sales Established by franchisees Franchisee may form an advertising cooperative and establish local advertising…
Sample Item 16: Restrictions on What the Franchisee May Sell ITEM 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL We require you to offer and sell only those goods and services that we have approved (see Item 9). You must offer all goods and services that we designate as required for all franchisees. These required…
Sample Item 21-1: Financial Statements ITEM 21: FINANCIAL STATEMENTS Attached to this disclosure document as Exhibit J are our audited, fiscal year end financials for 2005, 2006, and 2007. Attached to this disclosure document as Exhibit K are the audited, fiscal year end financials for 2005, 2006, and 2007 of subfranchisor Richard McDonald. Sample Item…
Sample Item 19-1: Financial Performance Representation (Based on Actual Historical Performance Results) ITEM 19: FINANCIAL PERFORMANCE REPRESENTATION The FTC’s Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included…
