In Item 1 of the FDD, you must disclose all parents, predecessors, and affiliates that will provide goods or services to your franchisees. You must also describe the franchise business offered, the franchisor’s prior experience in this business, and any industry-specific regulations that impact this business.
- A parent is an entity that controls the franchisor, either directly or indirectly. This control is usually in the form of ownership. An entity that owns more than 50% of the franchisor entity is a parent.
- A predecessor is an entity or individual that previously owned the franchise system. You are required to disclose all predecessors of the franchise system within the ten-year period before the Issuance Date of your FDD.
- An affiliate is an entity that provides products or services to the franchisee and is under the common control with the franchisor. If an entity has the same parent, the same owners or the same directors as the franchisor entity, this entity would be under common control and would be an affiliate. Often, the owners of a franchise system will form a holding company, and the holding company will form two subsidiaries – a franchisor entity and an IP entity. In the FDD, the franchisor entity will disclose information about the holding company, which is the parent, and information about the IP entity, which is the affiliate that provides goods and services (the trademarks) to franchisees. Other affiliates that may need to be disclosed in the FDD are entities under common control with the franchisor that sell inventory or other goods to franchisees or provide services to franchisees, such as design, construction, or marketing services. Affiliate entities that operate the franchisor’s corporate outlets do not need to be disclosed until these outlets serve as a franchisee training center.
You need to disclose in Item 1 any industry-specific licensing or regulations that your franchisee needs to be aware of to operate a business using your brand and system. The more complex and locally regulated the business is, the more robust this section will be. This is where we need your help, as you are the expert on your business and what hoops a franchisee needs to jump through to operate. Examples of industry-specific disclosures are: licensing requirements for teachers, healthcare professionals, or estheticians; serve-safe certificates for food handlers; sports coach certifications; sound-proofing requirements for certain premises; and procedures for hazardous waste storage and disposal. You need to tell us the specific requirements that apply to your concept, so we can put it in a form that is easy for your prospective franchisees to understand. Although it will ultimately be the franchisee’s responsibility to comply with industry-specific licensing and regulations, your goal in the FDD is to let them know in general terms what that may look like.
Throughout this guide, we will present sample sections from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 1
ITEM 1: THE FRANCHISOR, PARENTS, PREDECESSORS, AND AFFILIATES
To simplify the language, this disclosure document uses “we” or “us” to mean Belmont Mufflers, Inc., the franchisor. “You” means the individual, corporation, or other entity that buys a Belmont Muffler franchise.
Franchisor, Parent, and Affiliates
We conduct business under the name Belmont Muffler Shops. Our principal business address is 111 First Street, Jackson, Minnesota 55000. We are a Minnesota corporation that was incorporated on September 3, 1983. We do not conduct business under any other name.
Our corporate parent is CTF International, Inc. Its principal business address is 100 Main Street, Chicago, Illinois 77000.
Our affiliate is Belmont Muffler Manufacturers, Inc. Its principal business address is 222 Second Street, Jackson, Minnesota 55000. Belmont Muffler Manufacturers produces and supplies mufflers and related parts to Belmont and other muffler shops.
Agent for Service of Process
Our agent for service of process is Mr. John Smith. His principal business address is 185 Westfield Avenue, St. Paul, Minnesota 55111.
Prior Experience
We started operating muffler businesses in 1983. We started to sell Belmont Muffler Shops franchises in 1993. We currently own and operate 12 Belmont Muffler Shops. Each of these shops is located in urban areas, has approximately 8,000 square feet of floor space, and is located on a busy street. We also sell pipe bending machines, mufflers, and related automotive parts to various muffler shops.
Since 1983, Belmont Muffler Manufacturers, Inc., has been providing mufflers and related parts to muffler shops, including Belmont Muffler Shops franchises. It does not offer or sell franchises in any line of business.
From 1993 to 2003, we also offered franchises for “Repair-All Transmission Shops.” “Repair-All” franchises repaired and replaced motor vehicle transmissions under a marketing plan similar to the franchise offered in this document. Belmont sold 40 of these franchises, primarily in Minnesota, Michigan, Wisconsin, and Illinois. In 2003, Belmont sold this transmission repair company to CTF International, Inc., which no longer offers new “Repair-All” franchises for sale.
The Business We Offer
Your muffler shop franchise will sell and install mufflers, and related automotive parts and service to the general public. You must honor our guarantee to replace mufflers or exhaust pipes that wear out if the vehicle ownership has not changed. Our franchisees often operate their muffler shop franchise with their service stations or tire center. The market for muffler repair is fully developed. Your competitors include department store service departments, service stations, and other national chains of muffler shops.
Applicable Regulations
You must comply with federal, state, and local health and environmental safety regulations concerning the proper handling and disposal of oils, lubricants, cleaning fluids, and other products used in the business. You should investigate the application of these laws further.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
