Chapter 8 FRANCHISE LEGAL DOCUMENTS franchise disclosure document

Chapter 8 FRANCHISE LEGAL DOCUMENTS

franchise disclosure document (FDD) franchise Agreement Do you know? ? There are two legally required documents you should become very familiar with before franchising your business:

Disclosure Requirements “Offering circular” What is the Franchise Disclosure Document? q The first incarnation of the FDD was actually the UFOC: Uniform Franchise Offering Circular, created in 1979 by the Federal Trade Commission. q It was updated by the trade commission in 2007 and became the Franchise Disclosure Document. q The trade commission requires franchisors to disclose specific “essential information, ” in the form of the FDD, to the potential buyer at least 10 days before signing any contract.

Disclosure Requirements “Offering circular” q A franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process. q It was originally known as the Uniform Franchise Offering Circular (UFOC) (or uniform franchise disclosure document), prior to revisions made by the Federal Trade Commission in July 2007.

DISCLOSURE REQUIREMENTS “Offering circular” ü Rule requires the franchisor to deliver the franchise agreement. A. The parties’ first personal, face-to-face meeting to discuss the sale or possible sale of a franchise. B. At least ten business days before the franchisee executes a binding legal document or makes payment of any consideration for the franchise.

Contents of the Offering Circular The UFOC format of franchise disclosure consists of 23 categories of information that must be provided by the franchisor to the prospective franchisee at least ten business days prior to the execution of the franchise agreement. Item 1: THE FRANCHISOR AND ANY PARENTS, PREDECESSORS, AND AFFILIATES Item 2: BUSINESS EXPERIENCE Item 3: LITIGATION Item 4: BACKRUPTCY Item 5: INITIAL FEES Item 9: FRANCHISEE’S OBLIGATIONS Item 6: OTHER FEES Item 10: FINANCING Item 7: ESTIMATED INITIAL INVESTMENT Item 11: FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING Item 8: RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES Item 12: TERRITORY

Contents of the Offering Circular The UFOC format of franchise disclosure consists of 23 categories of information that must be provided by the franchisor to the prospective franchisee at least ten business days prior to the execution of the franchise agreement. Item 19: Item 13: Item 16: TRADEMARKS RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL. Item 14: PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION Item 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS. Item 17: RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION. Item 18: PUBLIC FIGURES FINANCIAL PERFORMANCE REPRESENTATIONS Item 20: OUTLETS AND FRANCHISEE INFORMATION Item 21: FINANCIAL STATEMENTS Item 22: CONTRACTS Item 23: RECEIPTS

Contents of the Offering Circular q COVER PAGE The FTC cover page displays required language admonishing the investor to investigate the offering carefully and contact authorities if there is anything missing from the document. Item 1: THE FRANCHISOR AND ANY PARENTS, PREDECESSORS, AND AFFILIATES Ø Ø This section will give you a general sense of the fanchisor, the franchise offering, the franchisor’s prior business experience, and the length of time it has been offering franchises.

Contents of the Offering Circular Item 2: BUSINESS EXPERIENCE ü This section lays out the business experience of the company’s directors, principal officers, and other executives who have management responsibility for the franchise program. ü 5 YEARS EMPLOYMENT HISTORY CEO FINANCIAL OFFICER MARKETING MANAGER TRAINING SUPERVISOR KEY EMPLOYEES FOR FIELD SUPPORT FOR FRANCHISEES

Contents of the Offering Circular Item 3: LITIGATION Three types of litigation must be disclosed on this Item; i. Pending administrative, criminal, and material civil actions. ii. Concluded criminal or material civil actions during the 10 year period before the date of the offering circular iii. Currently effective restrictive orders from a court when the order relates to the franchise.

Contents of the Offering Circular Item 4: BANKRUPTCY This section will reveal if the franchisor, its or any of its officers have been involved in a bankruptcy in the prior 10 years. Item 5: INITIAL FEES Requires the franchisor to disclosure all of the initial fees and other charges to be paid by the franchisee prior to opening the business. -The initial franchise fee covers the cost of training, recruiting, territory analysis, site identification, specialist equipment, stationary, franchisee launch, etc. Item 6: OTHER FEES -This item shows in chart form for continues payment that require to be pay from franchisee to franchisor. It might include such fees as the continuing monthly royalty, advertising contributions, training fees and expenses, audit cost and renewal fees.

Item 7: ESTIMATED INITIAL INVESTMENT This item summarizes the franchisee’s total initial investment and displays it in chart form. TYPE OF EXPENDITURE AMOUNT ($) METHOD PAYMENT WHEN DUE PAYMENT IS TO BE MADE TO WHOM Initial Franchise Fee 15000 Lump sum At signing off franchise agreement Travel and Living expenses while training 5000 As incurred During training Lease of building Equipment 52000 40000 Lump sum Annually Prior to Opening Signs Miscellaneous opening costs ( security deposits, utility costs, incorporation fees) 2200 Lump sum Prior to Opening Belmont Mufflers, Inc. . Airlines, hotels, andrestaurants Belmont Mufflers, Inc. Belmont or vendors Abbey Sign Company As incurred Suppliers utilities Lump sum As incurred(% of gross sales) Prior to Opening Belmont or vendors Belmont Mufflers, Inc. Employees, Suppliers and utilities Opening Inventory 8000 8800 Advertising fee-3 months Additional funds- 3 months 500 45000 TOTAL 176500 Monthly As incurred

Contents of the Offering Circular Item 8: RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES If the franchisee is required by the Franchise Agreement to purchase only approved products, or goods and services only from approved suppliers, or from only those suppliers designated by the franchisor. The franchisor must disclose revenue as the result of purchases by franchisees and, estimate the percentage of the franchisee’s expenses represented by the supply purchases. Required purchases You must purchase your pipe bending machine, hoist, cutting torch, mufflers, exhaust pipe, and other supplies under specifications in the operations manual. Required and approved suppliers You must purchase required equipment from Belmont or an approved supplier. Approval of alternative suppliers Belmont may approve other suppliers of mufflers and exhaust pipe who meet the specifications set forth in the operations manual. If you would like to purchase these items from another supplier, you must request our “Supplier Approval Criteria and Request Form. ” Revenue from franchisee purchases https: //aaronhall. com/sample-franchise-disclosure-agreement-item-8 -restrictions-on-sources-of-products-and-services/

Contents of the Offering Circular Item 9: FRANCHISEE’S OBLIGATIONS This item presents a cross reference table, highlighting the sections of the Franchise Agreement and the UFOC/FDD where various franchisee obligations, such as buying insurance and reporting information to the franchisor, are located. Obligation Section in agreement Disclosure document item a. Site selection and acquisition/lease Section 2 A of franchise agreement Items 6 and 11 b. Pre-opening purchase/leases Section 3 D of franchise agreement Item 8 c. Site development and other pre-opening requirements Sections 3 A and 3 B of franchise agreement Items 6, 7, and 11 d. Initial and ongoing training Section 5 of franchise agreement Item 11 e. Opening Section 4 of franchise agreement Item 11

Item 10: FINANCING If the franchisor offers financing for any part of the franchisee’s investment, the details of the financing will be discussed here. Item 11: FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING This is the longest narrative section of the document, detailing the contractual commitments that the franchisor makes to the franchisee, both before and after the opening of the business. ITEM 11: FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING Except as listed below, Belmont is not required to provide you with any assistance. Pre-Opening Assistance Post-Opening Assistance Advertising Computer Requirements Operating Manual https: //aaronhall. com/franchisor-assistance-advertising-computer-systems-training/

Item 12: TERRITORY The franchisor will describe any territorial rights the franchisee is granted under the Franchise Agreement. SAMPLES: You will receive an exclusive territory with a minimum population of 50, 000 people. You will operate from one location and must receive our permission before relocating. We will not operate stores or grant franchises for a similar or competitive business within your area. You are not restricted from selling Belmont products and services to customers residing outside your territory. Except when advertising cooperatively with appropriate franchisees, you are restricted from advertising outside your territory without prior written consent. You may not engage in any mail order solicitations, catalog sales, telemarketing, Internet, or television solicitation programs or use any other advertising media outside of your territory without prior written approval. We retain the right, in our sole discretion, to offer goods and services identified by brands we control through channels of distribution other than through Belmont Muffler Shops to locations and customers located anywhere, including those residing in your territory. We also reserve the right to sell goods though mail order, catalog sales, telemarketing, Internet, television, newspaper, and any other advertising media to consumers located anywhere, including within your territory. You do not receive the right to acquire additional franchises within your area. There is no minimum sales quota. You maintain rights to your area even if the population increases.

Item 13: TRADEMARKS Information about the “ principal trademarks” SAMPLES: We grant you the right to operate a shop under the name “Belmont Muffler Shop. ” You may also use our other current or future trademarks to operate your shop. By “trademark, ” we mean trade names, trademarks, service marks, and logos used to identify your shop. You must follow our rules when you use these marks. You cannot use a name or mark as part of a corporate name or with modifying words, designs, or symbols, except for those which we license to you. You may not use Belmont’s registered name in connection with the sale of any unauthorized product or service, or in a manner that we have not authorized in writing.

Item 14: PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION The UFOC requires a detailed description of any copyrights or patents that are material to the franchised business. Eg: An example of patent is a protection against copying the production method used to create M&Ms. Item 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS. The franchisor must disclose whether the franchisee is required to participate personally in the operation of the franchised business, AND if not, whether the franchisor recommends participation. SAMPLES: ITEM 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS If you are an individual, you must directly supervise the franchised business on its premises. If you are a corporation, a person who owns at least a 1/3 share of the corporate equity must perform the direct, on-site supervision of the franchised business.

Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL. The document reviews any restrictions or conditions imposed by the franchisor which limit the goods or services the franchisee or the customers to whom the franchisee may sell. SAMPLES: 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 services are muffler inspection, repair, and replacement. Parts, supplies, and equipment used in your Belmont Muffler business must be approved by us (see Item 8). We have the right to additional authorized services that a franchisee is required to offer. There are no limits on our right to do so except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $5, 000 per year. https: //aaronhall. com/restrictions-on-what-the-franchisee-may-sell-example-franchise-disclosure-document/

Item 17: RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION. The subjects relate to the duration of the contract, renewal rights. Whether renewal involves the execution of a new and possibly different Franchise Agreement, conditions for transfer, termination and any restriction on competitive activity during and after the term of the Franchise Agreement. It provides a convenient cross reference to where the topics appear in the Franchise Agreement and the table provides a short description of the provision. SAMPLES: Provision Section in Franchise Agreement Length of the franchise term Renewal or extension Section 1 Section 20 Termination by franchisor with cause Section 21 Summary Term is equal to lease term (10 years). If you are in good standing, upon expiration of your original franchise agreement, you will have the right to renew your franchise for another 10 year term by signing then current franchise agreement. This means that you may be asked to sign an agreement with terms and conditions that are materially different from those in your original agreement. Belmont can terminate only if you default. You have 30 days to cure: non-payment of fees, sanitation problems, nonsubmission of reports, and any other default not listed in. Non-curable defaults: conviction of felony, repeated defaults even if cured, abandonment, trademark misuse, and unapproved transfers. https: //aaronhall. com/restrictions-on-what-the-franchisee-may-sell-example-franchise-disclosure-document/

Item 18: PUBLIC FIGURES. The company must disclose the extent of the public figure’s involvement in the actual management of the franchisor and the public figure’s total investment in the franchisor. This covers public figures who lend their name or image to the franchise, control or manage the franchisor, or invest in the franchisor. Who Qualifies as a “Public Figure”? A public figure means a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located. Typical public figures include sports stars, actors, musicians, and similar celebrities. Use of Name, Image, or Endorsement If a public figure’s name is used as part of the franchisor’s name, the public figure’s image is used as a symbol associated with the franchise, or the public figure endorses or recommends the franchise to prospective franchisees, then the franchisor must disclose any compensation or other benefits given or promised to the public figure. Item 18 is limited to circumstances when a public figure’s identification with a system is for the purpose of selling franchises. Merely using a public figure as a spokesperson to promote a system’s products or services sold to consumers does not bring a franchisor within the ambit of the amended Rule’s Item 18 requirements. https: //aaronhall. com/restrictions-on-what-the-franchisee-may-sell-example-franchise-disclosure-document/

Management If a public figure is involved in the management or control of the franchisor, the franchisor must disclose the extent of that involvement, including the public figure’s position in the franchisor and his or her duties in the business structure. Investment If a public figure invests in the franchisor, the franchisor must disclose the type and total amount of his or her investment. The “type” of investment includes cash, stock, promissory notes, and any in-kind services performed or to be performed by the public figure.

Item 19: FINANCIAL PERFORMANCE REPRENSENTATIONS If the franchisor wants to show a prospective franchisee how he or she might perform financially, or how other franchisees in the system have performed, then information must appear in this item 19. Item 20: OUTLETS AND FRANCHISEE INFORMATION Item 20 includes tables summarizing (1) 3 years of statistical data about the number of unit that has been added or subtracted in the franchise program. (2) 3 years worth of statistical data regarding franchised units that has been transferred from one franchisee to another. (3) 3 years statistical status of company owned-stores (4) State by states breakdown of the projected franchised and company owned unit openings in the coming year. This item requires the franchisor to enclose as an exhibit a list of the names, addresses, and telephone numbers of those franchisees who left the system for any reason in the franchisor’s preceding fiscal year. https: //aaronhall. com/restrictions-on-what-the-franchisee-may-sell-example-franchise-disclosure-document/

Item 21: FINANCIAL STATEMENTS This item requires disclosure of the franchisor’s audited financial statements for the prior three fiscal years. Item 22: CONTRACTS This items requires the franchisor to enclose as an exhibit a sample copy of the Franchise Agreement, all related documents, and any other agreements that the franchisee will sign. Item 23: RECEIPTS This item contains two identical copies of a receipt for the delivery of the Uniform Franchise Offering Circular. One is designated to be retained by the franchisor; the other by the franchisee. https: //aaronhall. com/restrictions-on-what-the-franchisee-may-sell-example-franchise-disclosure-document/

CONTRACT

A franchise agreement is a complex contract, representing the binding understanding between the franchisor and the franchisee. q AREA DEVELOPMENT AGREEMENT ü This contract will allow a developer to build a number of franchised businesses in a particular market area and each one will be governed by the terms of a franchise agreement granted by the franchisor. q SUBFRANCHISING CONTRACTS ü In these programs, a sub franchisor (master franshisee) is granted the right to locate and sell individual franchises to individual investors in a defined region. ü Sub-franchising is the term used to describe the relationship between a master franchisee and the unit franchisee ü When a franchisor ‘goes international’the most common way of doing so is to appoint a master franchisee in each of the foreign markets in which it is intended to grow the system. The master franchisee acquires the rights to develop and franchise the system in that market - effectively becoming the franchisor.

FRANCHISOR (Located in US) Sub-Franchisor is granted the right to locate and sell individual franchises to individual investors in a defined region SUB-FRANCHISOR (MASTER FRANCHISEE) (Located in Malaysia) Unit Franchisee (Perlis) (Located in Malaysia) Unit Franchisee (Kedah) (Located in Malaysia) Unit Franchisee (Selangor) (Located in Malaysia)

Franchise Agreement üA Franchise Agreement is a legal, binding contract between a franchisor and franchisee. § INTRODUCTORY PRELIMINARIES (“RECITALS”) This portion of the agreement recites the parties who are entering into the contractual commitments, and lays out the basic mutual benefits of entering the contract. § GRANT OF THE FRANCHISE The franchisee accept the grant of right, and acknowledge here that the franchise must be operated according to operating manuals.

Franchise Agreement § TERM AND RENEWAL The duration of the contract will be specified. § TERRITORIAL RIGHTS These take the form of a promise by the franchisor that it will not establish another franchised business within a certain geographic area. § TRAINING AND GUIDANCE These provisions detail the training to be provided by the franchisor, where it will be provided, and who is required to attend. The franchisor may also promise to provide a level of continuing guidance and advice about the operation of the franchised business.

Franchise Agreement § TRADEMARKS AND COPYRIGHTS Trademarks have been called the cornerstone of the franchise relationship. These important commercial symbols are part of every franchise program and is licensed to the franchisee for the term of franchise agreement. § FEES TO BE PAID BY THE FRANCHISEE The franchisee must pay an “Initial Franchise Fee” in a lump sum of as much as $30, 000 or more when the franchise agreement is excuted. Then each month the franchisee pays a royalty fee measured as a percentage(between 3 and 8 percent) of the gross sales of the unit. § IMAGE AND OPERATING STANDARDS Operational standards will be adopted for the equipment and décor of the business, the menus, the music, the words used by front line sales representatives.

Franchise Agreement § ADVERTISING AND OTHER PROMOTION ACTIVITY If the franchisee wants to run an advertisement for the business, most franchise systems it would have to receive advance approval from the franchisor. RECORDKEEPING AND REPORTING The reporting of sales activity will be of prime importance to the health of the entire franchise network. INSPECTIONS AND AUDITS This provision allows the franchisor to physically inspect the premises of the franchised business and to review the franchisee’s financial books and records. .

Franchise Agreement § SITE SELECTION The franchisor reserves the right to approve the location of the franchised business, often after going through an exacting review of traffic count, community demographics, and town development plans. CONFIDENTIAL INFORMATION This provision often requires that the franchisee provide confidential information to store employees only on a “need to know” basis and only where steps are taken to protect the information. TRANSFER OF FRANCHISE RIGHTS BY THE FRANCHISEE This provision generally allows the franchisee to sell his business to another person, who will then become the franchisee, only after the franchisor approved the transaction. .

Franchise Agreement § TERMINATION The franchise agreement termination provision allows the franchisor to end the relationship only in several circumstances. Some specified circumstances will allow for termination immediately, without any opportunity to cure the problem. § FIRST REFUSAL RIGHTS TO PURCHASE Many franchise agreements reserve to the franchisor the right to buy back a franchise if the franchisee receives to purchase it. The repurchase is usually required to be on the same financial terms as the offer received from third party. . § OBLIGATIONS OF THE FRANCHISEE ON TERMINATION OR EXPIRATION If the relationship comes to an end, the franchise agreement usually requires the franchisee immediately to cease using the trademarks, take down the signs, the remove all forms of décor, interior signs, color schemes that identify the franchise, and assign to the franchisor the telephone numbers used by the business while it was part of the system. .

Franchise Agreement § ENFORCEMENT AND MISCELLANEOUS “BOILERPLATE” PROVISIONS usually appear at the end of a contract. v Sometimes they are referred to as the “miscellaneous” provisions. v Because they are at the end, people sometimes don’t feel they are important and don’t read or pay any attention to them. v This section may specify the state law that will govern the interpretation of the contract Eg: This agreement will be affective prior to 2 days after signing. Eg: These clauses will say that any variations or amendments to the agreement are only effective if made in writing and signed by both parties.

Franchise Agreement