FRANCHISE RED FLAGS AND TRAPS

First Run Broadcast: April 24, 2012

Live Replay: June 18, 2012

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

The number of people buying franchises hasn’t slowed in the slow economy. Instead, as clients

leave their professions, jobs and other businesses, they often seek a “pre-form” or “ready-made”

business in franchise opportunities. There’s a certain deep logic to the growth in franchising that

is unlikely to abate. This presents practitioners with the challenge of reviewing and negotiating

complex franchise agreements that seem to be written exclusively in boilerplate, appear non-

negotiable, involve complicated financial arrangements, and involve a host of unfamiliar federal

and state laws. This program will demystify franchising and its operative agreements, providing

you with practical guidance for understanding the financial and substantive legal arrangements

involved, tips for negotiating with franchisors and for spotting red flags before your clients buy.

Overview of the law governing franchising

How to evaluate the overall rewards and risks of franchises your clients are considering

Most important provisions of franchise agreements

Determining what’s negotiable and what’s not

Understanding the complex economic arrangements

Spotting franchise red flags and traps

Speaker:

Harris J. Chernow is a partner in the Philadelphia office of Chernow Kapustin, LLC, where he

has a national franchise, business transactional and real estate practice. He represents

franchisees and franchisors on the full range of franchise transactions, including licensing,

distribution, corporate structuring, retail development, and dispute resolution. He is a member of

the Governing Committee of the ABA’s Forum on Franchising and formerly as chair of the

Forum’s Litigation and Dispute Resolution Committee. He is also a contributor to the book

“Franchising 101, the Complete Guide to Evaluating, Buying and Growing Your Franchise

Business,” published by Upstart Publishing Company. Mr. Chernow received his B.S. from

Temple University and his J.D. from Temple University School of Law.

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Franchisee Red Flags & Traps

Teleseminar June 18, 2012

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Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: June 18, 2012 Seminar Title: Franchisee Red Flags and Traps Location: Teleseminar Credits: 1.0 General MCLE Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

PROFESSIONAL EDUCATION BROADCAST NETWORK

Speaker Contact Information

Franchise Red Flags & Traps

Harris ChernowChernow Kapustin, LLC – Philadelphia(215) 659-3600, ext. 102hchernow@chernowkap.com

WEBCREDENZAWEBCREDENZA

FRANCHISE RED FLAGS AND TRAPS:FRANCHISE RED FLAGS AND TRAPS:What You Should KnowWhat You Should KnowBefore Your Client BuysBefore Your Client Buys

April 24, 2012April 24, 2012

Harris J. ChernowHarris J. ChernowChernow Kapustin, LLCChernow Kapustin, LLC

Horsham (Philadelphia), PAHorsham (Philadelphia), PA

What is a What is a ““franchisefranchise””??

““FranchiseFranchise”” means different things:means different things:The FTC Franchise Rule (16 CFR 436)The FTC Franchise Rule (16 CFR 436)19791979 19931993 2007/20082007/2008State franchise and business opportunity lawsState franchise and business opportunity lawsIn business: to define various commercial In business: to define various commercial relationshipsrelationshipsAs a popular connotation in the media and every As a popular connotation in the media and every day lifeday life

The Elements of a The Elements of a Franchise under the FTC RuleFranchise under the FTC Rule

1.1. The franchisee is granted the right to operate a business associThe franchisee is granted the right to operate a business associated ated with a with a franchisorfranchisor’’s trademarks trademark or the right to sell goods and services or the right to sell goods and services associated with such trademark; associated with such trademark;

2. 2. The franchisor exerts The franchisor exerts controlcontrol over or gives significant over or gives significant assistanceassistance to to the franchisee in the method of operation (some state laws use the franchisee in the method of operation (some state laws use ““marketing planmarketing plan”” or or ““community of interestcommunity of interest””); and ); and

3.3. The franchisee pays a fee.The franchisee pays a fee.

All three elements must be satisfied to create a franchise. All three elements must be satisfied to create a franchise.

State Laws:State Laws:

Franchise registration and disclosure laws: Franchise registration and disclosure laws: regulate offer and sale of franchisesregulate offer and sale of franchises

Franchise relationship laws: regulate Franchise relationship laws: regulate termination, renewal and other relationship termination, renewal and other relationship mattersmatters

Variations in Variations in ““franchisefranchise”” definitiondefinition

If it is a franchiseIf it is a franchise……

then you must comply with the FTC Rule then you must comply with the FTC Rule and the applicable state disclosure laws.and the applicable state disclosure laws.

FRANCHISE DISCLOSURE DOCUMENT (FRANCHISE DISCLOSURE DOCUMENT (““FDDFDD””))

Disclosure Disclosure –– WhatWhat’’s The Purpose?s The Purpose?Franchisee perspective: Franchisee perspective: PrePre--sale disclosure sale disclosure provides prospective franchisees with important provides prospective franchisees with important information about the franchise system and information about the franchise system and offering.offering.Regulatory perspective: Regulatory perspective: PrePre--sale disclosure may sale disclosure may reduce fraud and leads to informed decision reduce fraud and leads to informed decision making.making.Franchisor perspectiveFranchisor perspective: Pre: Pre--sale disclosure sets sale disclosure sets forth expectations of franchisee and franchisor.forth expectations of franchisee and franchisor.

Federal and State RegulationsFederal and State Regulations

The Amended FTCThe Amended FTC RuleRule State LawsState Laws

Disclosure onlyDisclosure only •• Registration with reviewRegistration with reviewNo Federal registrationNo Federal registration •• Notice filingsNotice filingsPreempts onlyPreempts only •• Specific industry lawsSpecific industry lawsinconsistent or lessinconsistent or less •• Relationship lawsRelationship lawsprotective state lawsprotective state laws •• No lawsNo laws

Disclosure Disclosure –– Federal ExemptionsFederal Exemptions

1.1. Total required payments to franchisor will be under Total required payments to franchisor will be under $500 in first 6 months of franchisee$500 in first 6 months of franchisee’’s operations operation

2.2. Oral FranchisesOral Franchises3.3. Fractional FranchisesFractional Franchises4.4. Leased DepartmentsLeased Departments5.5. PMPAPMPA6.6. Large Initial InvestmentLarge Initial Investment7.7. Large FranchiseeLarge Franchisee8.8. Related PartiesRelated Parties

Disclosure Disclosure –– State ExemptionsState Exemptions

Vary by stateVary by stateMay only be from registration and not from disclosureMay only be from registration and not from disclosure

Types of exemptionsTypes of exemptions–– Fractional franchisesFractional franchises–– RenewalsRenewals–– Additional outletsAdditional outlets–– Sales by franchiseesSales by franchisees–– Isolated salesIsolated sales–– BanksBanks–– Franchisor size and experienceFranchisor size and experience–– Sophisticated franchiseeSophisticated franchisee

State RegistrationState Registration

Fourteen States have registration and Fourteen States have registration and disclosure requirements:disclosure requirements:

CaliforniaCalifornia HawaiiHawaii IllinoisIllinoisIndianaIndiana MarylandMaryland MichiganMichiganMinnesotaMinnesota New YorkNew York North DakotaNorth DakotaRhode IslandRhode Island South Dakota VirginiaSouth Dakota VirginiaWashingtonWashington WisconsinWisconsin*Other states*Other states--Notice FilingsNotice Filings

Franchise Relationship StatesFranchise Relationship States

ArkansasArkansas •• MinnesotaMinnesotaCaliforniaCalifornia •• MississippiMississippiConnecticutConnecticut •• MissouriMissouriDelaware Delaware •• NebraskaNebraskaHawaii Hawaii •• New Jersey New Jersey IllinoisIllinois •• N. Carolina N. Carolina -- forumforum selectionselection

IndianaIndiana •• Rhode IslandRhode IslandIowaIowa •• VirginiaVirginiaLouisiana Louisiana –– forumforum •• WashingtonWashingtonMichiganMichigan •• WisconsinWisconsin

Representing the FranchiseeRepresenting the Franchisee

Franchisee Concerns Franchisee Concerns –– Why Buy a Franchise?Why Buy a Franchise?

Why shouldnWhy shouldn’’t I do this myself?t I do this myself?For what do I need them?For what do I need them?How will you improve my How will you improve my chances for success?chances for success?What does it cost to enter?What does it cost to enter?What will I save with you?What will I save with you?What do I pay over time?What do I pay over time?How much can I make?How much can I make?How will you help me?How will you help me?What happens when I want to What happens when I want to exit the business?exit the business?Numerous questions to askNumerous questions to ask

The Phases of Franchisee Representation:The Phases of Franchisee Representation:

Counseling the Prospective FranchiseeCounseling the Prospective Franchisee

Due Diligence Due Diligence –– client dutyclient duty

Negotiating the Franchise Agreement Negotiating the Franchise Agreement

Business and Real Estate/Lease IssuesBusiness and Real Estate/Lease Issues

Litigation and ArbitrationLitigation and Arbitration

Counseling The Prospective Franchisee Counseling The Prospective Franchisee

Understand the clientUnderstand the client’’s backgrounds backgroundKnow your clientKnow your client’’s needs/expectationss needs/expectationsBe clear about your role (and limitations)Be clear about your role (and limitations)

-- Business v. LegalBusiness v. LegalEmphasize your clientEmphasize your client’’s need to do his/her s need to do his/her own Due Diligenceown Due Diligence

What is a Good Franchise OpportunityWhat is a Good Franchise Opportunity

ROIROIBig $$Big $$Good Track RecordGood Track RecordGrowth PotentialGrowth PotentialBuying a JobBuying a JobRemember: Remember: NoNo guaranty!guaranty!Are you the one to determine this?Are you the one to determine this?

DUE DILIGENCEDUE DILIGENCE

FDDFDDTalk to those in and out of the system Talk to those in and out of the system Know the competitionKnow the competitionConsult knowledgeable financial Consult knowledgeable financial professionals (accountants)professionals (accountants)State regulatorsState regulatorsBetter Business BureauBetter Business BureauOther attorneysOther attorneys

What to Look for:What to Look for:

Start With The Documents!Start With The Documents!–– The Sales Materials & Promotional PiecesThe Sales Materials & Promotional Pieces–– The FDDThe FDD–– The Franchise AgreementThe Franchise Agreement–– Any Any ““Supplemental informationSupplemental information”” --

representationsrepresentations

The FDD: READ ITThe FDD: READ IT

(because your client probably didn(because your client probably didn’’t)!t)!

WHATWHAT’’S IN THE FDDS IN THE FDDItem 1: The Franchisor and any Parents, Item 1: The Franchisor and any Parents,

Predecessors, and AffiliatesPredecessors, and Affiliates

Item 2: Business ExperienceItem 2: Business Experience

Item 3: LitigationItem 3: Litigation

Item 4: BankruptcyItem 4: Bankruptcy

Item 5: Initial FeesItem 5: Initial Fees

Item 6: Other FeesItem 6: Other Fees

WHATWHAT’’S IN THE FDDS IN THE FDDItem 7: Estimated Initial InvestmentItem 7: Estimated Initial Investment

Item 8: Restrictions on Sources of Products Item 8: Restrictions on Sources of Products and Servicesand Services

Item 9: FranchiseeItem 9: Franchisee’’s Obligationss Obligations

Item 10: Financing Item 10: Financing

Item 11: FranchisorItem 11: Franchisor’’s Assistance, Advertising, s Assistance, Advertising, Computer Systems and TrainingComputer Systems and Training

WHATWHAT’’S IN THE FDDS IN THE FDDItem 12: Item 12: TerritoryTerritory

Item 13:Item 13: TrademarksTrademarks

Item 14:Item 14: Patents, Copyrights and Proprietary Patents, Copyrights and Proprietary InformationInformation

Item 15: Obligation to Participate in the Actual Item 15: Obligation to Participate in the Actual Operation of the Franchised BusinessOperation of the Franchised Business

Item 16:Item 16: Restrictions on What the Franchisee Restrictions on What the Franchisee May SellMay Sell

WHATWHAT’’S IN THE FDDS IN THE FDDIItem 17: tem 17: Renewal, Termination, Transfer and Dispute ResolutionRenewal, Termination, Transfer and Dispute Resolution

Item 18:Item 18: Public FiguresPublic Figures

Item 19: Item 19: Financial Performance Financial Performance Representations (Earnings Claims)Representations (Earnings Claims)

Item 20:Item 20: Outlets and Franchisee InformationOutlets and Franchisee Information

-- Also includes Franchisee AssociationsAlso includes Franchisee Associations

Item 21:Item 21: Financial StatementsFinancial Statements

Item 22:Item 22: ContractsContracts

Item 23:Item 23: Receipts Receipts –– Electronic DisclosureElectronic Disclosure

FRANCHISE AGREEMENT NEGOTIATIONSFRANCHISE AGREEMENT NEGOTIATIONS

The FranchisorThe Franchisor’’s Perspective:s Perspective:

NeverNever •• Are You KiddingAre You KiddingNo WayNo Way •• See YaSee YaGood TryGood Try •• Take it or Leave ItTake it or Leave ItTry AgainTry Again •• ItIt’’s Uniform/Standards Uniform/StandardNot While INot While I’’m Herem Here •• No! No!

The FranchisorThe Franchisor’’s Perspectives Perspective

Reasons Why Reasons Why Franchisors WonFranchisors Won’’t Negotiatet Negotiate

No Need No Need –– Market DemandMarket Demand

Standard Standard ““UNIFORMUNIFORM”” contract contract –– Now FDDNow FDD

Too burdensome to controlToo burdensome to control

If negotiate with one, will have to negotiate with If negotiate with one, will have to negotiate with allall

Maintain ultimate upper hand and strengthMaintain ultimate upper hand and strength

Negotiating the AgreementNegotiating the AgreementMAYBE MAYBE –– MAYBEMAYBE NOTNOT

The Wish ListThe Wish ListThe PartiesThe Parties

LocationLocation

TerritoryTerritory

Alternative Channels of DistributionAlternative Channels of Distribution

AdvertisingAdvertising

RoyaltiesRoyalties

““THE WISH LISTTHE WISH LIST””TrainingTraining

Initial Franchise FeeInitial Franchise Fee

Grand Opening and Continuing AssistanceGrand Opening and Continuing Assistance

Assignment of Telephone Numbers and Domain Names Assignment of Telephone Numbers and Domain Names

Capital ExpendituresCapital Expenditures

Additional Lease IssuesAdditional Lease Issues

Discretionary TermsDiscretionary Terms

““THE WISH LISTTHE WISH LIST””Implementation of New Standards, Products and/or RequirementsImplementation of New Standards, Products and/or Requirements

Financial RecordsFinancial Records

Trademark/Service Marks Trademark/Service Marks -- Changes/IndemnificationChanges/Indemnification

Renewal Renewal –– ““The Current Form of Franchise AgreementThe Current Form of Franchise Agreement””

TransferTransfer

Additional TransfersAdditional Transfers

Default ProvisionsDefault Provisions

““THE WISH LISTTHE WISH LIST””NonNon--Compete/Restrictive CovenantsCompete/Restrictive Covenants

Venue, Forum Selection, WaiversVenue, Forum Selection, Waivers

Liquidated DamagesLiquidated Damages

Transfers by the FranchisorTransfers by the Franchisor

Termination/Future RoyaltiesTermination/Future Royalties

Franchisor v. Franchisee ObligationsFranchisor v. Franchisee Obligations

What Else to Look For:What Else to Look For:

Follow Up by Exploring Follow Up by Exploring ““StatementsStatements””Made by the Franchise Sales Team:Made by the Franchise Sales Team:–– ““Earnings ClaimsEarnings Claims”” or FPRsor FPRs–– Representations Regarding SuccessRepresentations Regarding Success–– Any Terms Any Terms NotNot reflected in the Written reflected in the Written

Franchise AgreementFranchise Agreement

Negotiating The Franchise Negotiating The Franchise AgreementAgreement

Unlike most Unlike most existingexisting franchisees, franchisees, prospects HAVE leverageprospects HAVE leverage……will they use will they use it?it?–– Prospects are the CustomersProspects are the Customers–– Money TalksMoney Talks–– DonDon’’t Always Believe the Hypet Always Believe the Hype–– Be Willing to WalkBe Willing to Walk

Franchise Agreement Franchise Agreement Key Issues for FranchiseesKey Issues for Franchisees

Fees Fees –– Initial, ongoing, transfer, exitInitial, ongoing, transfer, exitTerritory Territory –– site only v. exclusive areasite only v. exclusive areaMarketing, advertising & technologyMarketing, advertising & technologyTerm & RenewalTerm & RenewalFranchisor ServicesFranchisor ServicesOperating Standards Operating Standards –– unfettered discretionunfettered discretionUpdating the brand and the store Updating the brand and the store –– compelling compelling catastrophecatastropheNonNon--competitioncompetitionFranchisee obligations & restrictionsFranchisee obligations & restrictionsTimetablesTimetablesTransfer/Exit IssuesTransfer/Exit Issues

THE FRANCHISE DISCLOSURE DOCUMENT

A Very General Overview A fundamental component in the due diligence process is the franchise disclosure document (“FDD”) required by the Federal Trade Commission (“FTC”) Rule. See 16 C.F.R. Part 436. Under the FTC Rule, a prospective franchisee must, in general, receive a copy of the franchisor’s disclosure document, at least 14 days prior to executing the franchise agreement or remitting any money to the franchisor or its affiliate. The 14 day period serves as a “cooling off period” to assist a prospective franchisee in making an informed decision. The franchisor may provide a copy of its disclosure document on paper, or electronically (e.g., electronic mail, CD, web page, etc.). In the event the franchisor elects to disclose a franchise prospect electronically, the disclosure document cannot contain any pop-ups, enhancements, or additional materials that are not included in the paper version. A disclosure document prepared in conformity with the FTC’s Guidelines will contain a cover page, a state cover page, information on 23 specified items and attached exhibits that include copies of all franchise-related agreements and other specified exhibits. The following is a brief overview of the items of disclosure that must be contained in a franchise disclosure document. Cover Page: The cover page must contain certain identifying information, a brief description of the franchised business and the franchisee’s initial investment. State Cover Page: The state cover page must specify certain risk factors. The specification of additional factors may be required by certain registration states, at their discretion. Item 1: The Franchisor, and any Parents, Predecessors, and Affiliates: In this section the franchisor will provide basic identifying information of the Franchisor, and any parent, predecessors and affiliate. This information includes an overview of the franchisor’s background, a description of its business, and a description of the franchise that it offers. This section also provides basic information relating to competition and applicable industry laws and regulations.

Item 2: Business Experience: This section disclose the names of individuals involved in the offer of the franchises. Included are the franchisor’s directors and principal officers. Also included are other individuals who have management responsibility with respect to the offered franchise. For each individual listed in this Item, the franchisor must identify their current positions, as well as their prior employers and occupations during the preceding five year period.

Item 3: Litigation: Under this Item, franchisors must disclose litigation (including arbitration proceedings) involving themselves or any of the individuals identified in Item

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2. Pending litigation as well as litigation concluded in the past ten years must be identified as well. Litigation initiated by the franchisor in the past year must be identified. There are many considerations in determining whether a particular claim must be disclosed under this Item and, if so, how the disclosure should be written. In general, if the litigation would be deemed “material” to the franchisee’s investment decision, then it must be included. “Materiality” is viewed from the perspective of a reasonable prospective franchisee.

Item 4: Bankruptcy: This Item requires franchisors to disclose the bankruptcy histories of themselves and any of the individuals listed in Item 2. Additionally, if one of the franchisor’s officers was the principal officer of another company that declared bankruptcy, then this bankruptcy must be disclosed. You must disclose the bankruptcy history of all applicable bankruptcies commenced during the ten year period immediately prior to the date of the disclosure document.

Item 5: Initial Fees: This Item requires franchisors to identify their initial franchise fee. This disclosure includes all fees and payments charged by the franchisor or its affiliate for any goods and services provided to franchisees before they open their business. This Item also requires disclosure of variations in initial fees that you are willing to negotiate or have negotiated. The franchisor must also disclose if the fees are uniform to every prospective franchisee. If not, they must disclose a range of fees paid in the last year. This Item also requires a disclosure as whether the Initial Fees are refundable, and if so, under what circumstances. Item 6: Other Fees: Under this Item franchisors must insert a table that sets out the recurring or isolated fees that franchisee must pay to the franchisor and its affiliates during the franchise relationship (e.g., royalty payments, marketing fund, renewal fees, etc.) The table must identify the name of the fee, the amount of the fee, and the date the fee is due. The table must also have a remarks column that is used to elaborate on information provided. The franchisor must also indicate whether each fee is uniformly imposed. Item 7: Estimated Initial Investment: This Item requires disclosure, in tabular form, of all expenditures that franchisee must make before beginning operations. Included in the table should be the initial franchise fee, specified categories of pre-opening expenses and additional funds that the franchisee should expect to spend during the initial start up of his/her business. The additional funds should cover a three month period after the franchisee has begun operations. The table must identify the amount of the expense, the method of payments, when it should be paid, to whom it is paid, whether it can be financed and whether it is refundable.

Item 8: Restrictions on Sources of Products and Services: Franchisors must disclose any product or services that the franchisee must purchase or lease from the franchisor, its affiliate(s) or its approved suppliers. With respect to any required purchases or leases, the franchisor must provide an estimated proportion of the amount the franchisee will spend on the required purchase as compared to the total amount he/she must spend in

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opening and operating the franchise business. Franchisors must also disclose whether any of its officers owns an interest in an approved supplier and the franchisor’s financial interest in the required purchase (e.g., rebates paid to the franchisor).

Item 9: Franchisee’s Obligations: The disclosure under this Item consists of a table on which franchisors must list specified obligations of their franchisees and must identify the sections of the franchise agreement and disclosure document where these obligations appear.

Item 10: Financing: Here franchisors disclose the material terms and conditions of any financing arrangement that they offer to their franchisees. With respect to any arrangement, franchisors must disclose information about specified liabilities of the franchisee under that arrangement. The section of the financing document that identifies that liability must be cited. All financing documents must be attached as an exhibit to the disclosure document. An example of a financing arrangement is a promissory note used in the financing of the franchise fee.

Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training: Under this Item, franchisors must disclose any of their obligations to the franchisee before and during the operation of his/her business. In the disclosure document, these obligations should be identified and a citation to the corresponding section of the franchise agreement must be provided. This Item must also contain a table that sets forth information about the franchisor’s training program including the subjects taught, the location of training, and the hours of on-the-job and classroom training provided for each subject. This Item must also provide information about the qualifications of each instructor. The franchisor must also disclosure its operating manual table of contents or access to the operating manual itself. This Item must also specify any mandatory computer or software purchases and related costs that a franchisee will incur. The franchisor must also disclosure its operations manual table of contents or access to the operations manual itself. Item 12: Territory: In this Item the franchisor describe its franchisee’s rights with respect to the territory granted in the franchise agreement. Territorial rights and restrictions are a frequently contested component of a franchise relationship. Accordingly, the franchisor should clearly identify what its franchisee is not receiving. For example, if the franchisee is receiving no exclusivity with respect to the territory, then the disclosure document should so specify. Additionally, the franchisor must disclose the rights that it retains in the territory, such as the right to license others or the right to operate a company-owned store. Item 13: Trademarks: In this Item, the franchisor identifies the trademarks that the franchisee is licensed to use under the franchise agreement. The franchisor must also disclose any material opposition or litigation regarding the marks. Trademarks are an important aspect of a franchise system.

Item 14: Patents, Copyrights and Proprietary Information: This Item requires disclosure or any patents or copyrights that the franchisor owns and that are material to the franchise relationship. The franchisor must also identify any material that is important to the

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franchise relationship to which it claims copyright protection or that it considers confidential or proprietary. For all such material, the franchisor must disclose the general subject matter and the conditions of the use of that material by its franchisee.

Item 15: Obligations to Participate in the Actual Operation of the Franchise Business: Here franchisors disclose their franchisees’ obligation to personally participate in the day-to-day operation of their business. Franchisors must also disclose any restrictions placed on the franchisees’ hiring of a manager or on the duties to be performed by managers.

Item 16: Restrictions on what the Franchisee may Sell: Under this Item, franchisors will disclose the restrictions on the services to be provided by its franchisees. Franchisors must also disclose whether the franchisor has the right to change the types of authorized goods or services and whether there are any restrictions on the franchisor's right to make such changes.

Item 17: Renewal, Termination, Transfer and Dispute Resolution: Franchisors must provide a table that addresses specified subjects relating to the term, renewal, termination and assignment of franchises. The table must also address the death of a franchisee, non-competition, dispute resolution and choice of forum and law.

Item 18: Public Figures: Here franchisors disclose information about any public figure used in connection with the sale of the franchise.

Item 19: Financial Performance Representation: A Financial Performance Representation (“FPR”) is any representation that states or suggests a specific level or range of potential or actual sales, income or profit. Any FPR that is made in connection with the offer of a franchise, or is made to the media for the purpose of soliciting franchisees, must be included in full in Item 19. Franchisors that do not elect to make a FPR must make a negative disclosure in this Item.

Item 20: Outlets and Franchisee Information: Under this Item, franchisors disclose information regarding the size their franchise system. The list of outlets is displayed in tabular form containing information about the number of franchised business and company owned locations, for the past three fiscal years, listed by state. The table must identify franchises that were: 1) transferred; 2) canceled or terminated; 3) not renewed; 4) reacquired by the franchisor; 5) otherwise ceased operations and 6) operating at the end of the fiscal year.

Item 20 additionally requires franchisors to attach two lists of franchisees. The first lists the names, addresses and telephone numbers of all operational franchisees. The second lists the names and the last known addresses and telephone numbers of every franchisee whose agreement was terminated, canceled, not renewed, who otherwise voluntarily or involuntarily ceased to do business under his/her franchise agreement, or who has not communicated with the franchisor during the preceding ten weeks.

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Item 21: Financial Statements: This Item requires franchisors to include financial statements from their preceding fiscal years as an attachment to their disclosure document. Specifically, franchisors must include audited balance sheets their past two fiscal years and statements of operations, shareholders’ equity, and cash flows for the past three fiscal years.

Federal law requires franchisors to update their Disclosure Document to include audited financial statements from the preceding fiscal year by no later than 120 days from the end of that year.

Item 22: Contracts: Franchisors must attach copies of all standard agreements related to the offer of the franchise and the ongoing franchise relationship. These agreements include the franchise agreement, promissory notes (if applicable), and any other standard document that the franchisee may have to sign in connection with the purchase of the franchise or the ongoing franchise relationship.

Item 23: Receipt: The last two pages of the disclosure document should be duplicates of a document through which a prospective franchisee acknowledges receipt of the disclosure document. Upon receipt of the FDD, the prospective franchisee should sign and date both receipts. One receipt should be retained by the franchisee and the other should be returned to the franchisor. The receipt contains language regarding the FTC Rule’s document delivery provision. The receipt must also specify that a failure to deliver the offering circular in the proper time or the delivery of a false or misleading offering circular may be a violation of federal or state law and should be reported to the FTC or state regulatory agency.

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