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Decoding the Franchise Disclosure Document From A to Z – Item #16

‘Restrictions on what the franchise can sell’ is the topic of Item #16 of the Franchise Disclosure Document. Pay attention to the title here. It’s important to understand that this is not an exhaustive list of the products or services that you will be required to offer – rather, it’s a disclosure of the ‘restrictions’ on what you can offer. Big difference.

What you’ll learn:

• The franchises policy on approving product and service offerings
• How much discretion you have to add to – or eliminate – what you offer, including

  • Any optional products or services

• The franchises rule on changing the list of approved products and services, including

  • Whether or not there are any limitations on the franchise itself

Why is this important?

First of all, let’s explain this a bit further. Item #16 of the FDD is simply a confession by the franchise, telling you exactly how much control they will retain over the products and services that you will be allowed – and required – to offer at your franchise location. In other words, they’re not giving you a list of those items here – they are just revealing what their policy is on the matter. For more details on the specifics of your products, see Item #8.

For example, larger franchises such as Subway are often very specific about what products will be offered at their locations. Franchisees generally have very little discretion in determining their menu or service offerings. So, Item #16 of their FDD will say something to the effect of, ‘You must offer all goods and services that we designate as required for all franchisees.’ Pretty straight-and-to-the-point.
Other franchises are more lenient – giving franchisees more control – and may contain language saying that, ‘We also designate some services as optional for qualified franchisees.’

Every franchise has their own rules and ways of determining which products and services will be offered where and whether or not the franchises have any say in the matter. All of them are different, so it’s important that you read through this carefully and understand their rules so that you can stay in compliance with your new franchise.

Additionally, Item #16 will tell you the franchises rules for how and when they can make changes to the approved list of products and services. Some have given themselves restrictions – a democratic system so-to-speak – for making changes, so that products and services aren’t constantly being moved around. Others’ are more of a free-for-all, giving themselves leeway to make changes whenever they please.

That said there are a few things to look out for here. First, be cautious of any franchise that has a very limited product offering. If you’re selling sports equipment – but the franchise is too restrictive on what you can sell – then you may not have enough of a variety to keep customers coming through the door. On the other hand, watch out for franchises that maintain little to no control over what their franchisees are selling. This could be a red flag that there’s no brand consistency, thereby making the franchise model weak.

Finally, pay close attention to the franchises rules on how and when they can make changes to the approved product list. If there is absolutely zero restriction on how often they can make changes to the product offering – and no rules giving the franchisees some say in the matter – then seek professional advice on the sustainability and security of the franchise model. A sound franchise will have rules – even for the top dogs at corporate. It helps to ensure the feasibility and duplicability of the franchise model.

The bottom line is that Item #16 is a full-blown declaration from the franchisor on how tight the reigns will be when it comes to the products and services that you offer. Know how you feel about control and make sure that it’s a good fit for the franchise model that you’re looking at. If you’re not sure how to determine if a franchise model is right for you, download our free guide on ‘What to Know Before You Buy.’

Coming up next week in Item #17: Dispute Resolution. How does your franchise handle trouble….?