Franchise Disclosure Document Item 16 Secrets You Should Know

19.06.23 07:38 PM By Stacey Riska

Franchise Disclosure Document Item 16 Secrets You Should Know

Today we're going to be diving into another section of the Franchise Disclosure Document (FDD). There are 23 sections and we highly encourage you to go back and learn about some of the previous Items that we have covered. Some of these Items are progressive, so you will have reviewed some precursor information that sometimes shows up later in later Items of the FDD.

Item 16 of the Franchise Disclosure Document (FDD) is really an extension, a little bit, of Item 15. It spells out the limitations that you have as a franchisee as far as what you can offer products and services-wise based on being a franchisee of a particular franchise. There are really three different scenarios that are in this particular item. 

Are you able to sell items that are not authorized by the franchisor? 

This sub-item is answering the question of whether the franchisee may sell only the goods or services approved by the franchisor. So think of this as yourself being in a pizza franchise and you're selling all kinds of pizza, but the franchisor doesn't have gluten-free or thin crust, but you want to offer those two, it's pizza, right? Can you just add a gluten-free and thin-crust pizza to the menu? What do you think?

We say you would likely have to get approval for it, and no, you can't just go out and decide to do that. This is spelled out in this particular item, usually in every Franchise Disclosure Document (FDD). So be aware of what these restrictions and limitations of your product and service offerings can be based on your relationship with a particular franchise.

To elaborate a little bit more. Hopefully, the pizza example made sense, but sometimes candidates will come to us and they'll be like, oh, well this franchise only does this type of business, or only has one or two revenue streams, and I want to add on these because they tie in and to you, it may make sense. 

Remember that a franchise is a proven system and they are likely only offering those specific sets of goods, products, or services because they know that it works. If you have too many things, it's easy to get just pulled in all these different directions and then you're nothing to nobody. So try to understand that the franchise in most systems has a very limited set of products and services for a reason. If you think you have a good reason and can validate the case why something should be added, just make sure you understand where and how you can get approval to do that.

The point here is you're buying a proven system and there are lots of sayings about too many irons and too many fires. You would have a difficult time staying focused if you go too far out of the boundaries of the system that you've purchased anyway. What we find is that in business sometimes people want to expand and grow their revenues, but they don't realize it doesn’t necessarily translate to the bottom line anyway. Meaning that it just is a distraction from what your core business is and if you just focus on your core business you'd probably be better off. 

So let's dive into the second part of this item.

Restrictions of a franchise that requires you to offer all of their products without limitations 

This would mean that you're required to offer them on your menu of services or products, regardless of whether you want to or not. There are two sides to it, but that's the keyword. All goods, products and services. So whether you want to or not, in this item, it's delineating that you may have to agree to sell all of it. 

Sometimes this can become an issue for organizations that are open seven days a week. Some people may have a bias towards being open on a Sunday or being open in the evening, certain hours. Or I'm gluten-free, so I can't offer things that have gluten in them. Whatever your reason is, it doesn't matter if the franchise says you have to offer all of it, you must offer all of it. 

On the other side of it, there are many franchises that kind of have a mandate of offering a core set of goods, products, and services, and then have items that are optional. This is good in a situation where it may be local or regional. Thinking about this in our coffee smoothie business, they gave us a lot of freedom and flexibility in this regard because they may have mandated that coffees and smoothies are mandatory, but we could pick the flavors. Or we could come up with a fun name for it that had a Hawaiian theme to it. So there were some things that were optional even in our coffee smoothie business. For example, catering as a business model wasn't mandated and definitely not offered by all franchisees of the system. It was an optional thing that you could decide to invest in and snap that onto your business.

Item 16 lays out the flexibility that you have of offering additional or having to offer all of the products and services of a particular franchisor. 

Winding it up now with number three. 

Does the franchisor have the right to expand the product offering in any way? 

This came into play in our own franchise for certain. We have been in this franchise now for 17 years, but the products and services and even the business model have evolved moderately over that time. When we first came into the franchise, they did not have a brick-and-mortar. We were one of the first to have a brick and mortar. They didn't have a food truck. We were one of the first to have a food truck. They expanded the menu to include Hawaiian Shave Ice. That was a product that customers were clamoring for, but we couldn't offer it because it wasn't an approved item. So these are just a few examples of how over time, especially in an emerging franchise, those products and services will likely morph a good bit

The FDD Item 16 typically spells out whether they can morph at all, meaning is the franchise even capable of adding products or services. So if you're looking for a franchise that is going to be a little bit more lenient as far as adding products, then certainly this clause would have to be there for them to be able to add that to their list of products or services. 

So that's really all we have for Item 16 of the FDD. We're going to keep marching forward. If you want a hand understanding the Franchise Disclosure Documentplease feel free to reach out to us anytime. It’s always suggested that you seek legal council in evaluating any legal documents such as the FDD.

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 Author Bio

I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.
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