Understanding Important Requirements in Item 11
By Mario Herman, Esq.
Item 11 of the Franchise Disclosure Document provides information and
disclosure relating to Electric cash registers, Computers and the Franchise
Operations Manual. It’s important for prospective franchisees to understand
what all of this means.
In an effort to ensure that prospective franchisees are fully informed
regarding start-up ad operational costs, and provide other important
information, the Federal Franchise Disclosure Rule requires that a
franchisor disclose to its prospective franchisees whether the franchisor
requires the franchisee to buy or use electronic cash registers or computer
systems. If it does, then the franchisor must describe the systems generally
in non-technical language, including the types of data to be generated or
stored in these systems. Additionally, the franchisor must disclose:
(i) The cost of purchasing or leasing the systems.
(ii) Any obligation of the franchisor, any affiliate, or third party to
provide ongoing maintenance, repairs, upgrades, or updates.
(iii) Any obligations of the franchisee to upgrade or update any system
during the term of the franchise, and, if so, any contractual limitations on
the frequency and cost of the obligation.
(iv) The annual cost of any optional or required maintenance, updating,
upgrading, or support contracts.
(v) Whether the franchisor will have independent access to the
information that will be generated or stored in any electronic cash register
or computer system. If so, the franchisor must describe the information that
the franchisor may access and whether there are any contractual limitations
on the franchisor’s right to access the information.
It is important that you review the FDD to know whether and how often you
will be required to purchase and/or upgrade the above referenced equipment.
Important considerations include whether there is a limit on what you may be
required to spend on such equipment and how often you will be required to
upgrade. These costs add up, and can subtract significantly from you
bottom line, while potentially padding the franchisor’s bottom line if the
franchisor receives a rebate or other compensation from the supplier of such
equipment.
Additionally, a franchise is required under Item 11 to disclose the table
of contents of the franchisor’s operating manual provided to franchisees as
of the franchisor’s last fiscal year-end or a more recent date. The
franchisor must state the number of pages devoted to each subject and the
total number of pages in the manual as of this date. This disclosure may be
omitted if the franchisor offers the prospective franchisee the opportunity
to view the manual before buying the franchise. Few, if any
franchisors are willing to allow a prospective franchisee to review the
operating manual before the sale of the franchise. However, making
such a request is something an experienced franchise law attorney may be
able to negotiate for you with the prospective franchisor.
Mr. Herman, licensed in Washington, D.C., represents franchisees
domestically and internationally in negotiation, mediation, arbitration, and
litigation with their franchisors.
mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)
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