Prospective franchisees should thoroughly review Item 12, consider how the territorial rights and restrictions align with their business goals and strategy, and consult with an attorney specializing in franchise law to navigate the complexities of these provisions.
UNDERSTANDING ITEM 12 OF THE FRANCHISE DISCLOSURE DOCUMENT: TERRITORY
By Gary Occhiogrosso – Managing Partner, Franchise Growth Solutions, LLC.
The Franchise Disclosure Document (FDD) is a legal document that all franchisors must provide prospective franchisees in the United States to provide essential information necessary to make an informed decision about investing in a franchise. The Franchise Disclosure Document is regulated by the Federal Trade Commission (FTC), and each of its 23 items is designed to disclose specific aspects of the franchise offering and the franchisor.
Item 12 of the FDD is focused explicitly on “Territory.” This section of the document provides information about the franchisee’s territorial rights. It’s crucial to understand the geographical scope within which the franchisee can operate and whether the franchisor retains the right to open additional franchises within that territory, which might compete with the franchisee’s operations. Here’s what is generally covered in Item 12:
- Exclusive vs. Non-exclusive Territories: It details whether the franchisee will be granted an exclusive territory (meaning the franchisor agrees not to open or license another franchise within a particular geographical area) or a non-exclusive territory.
- Territorial Protections: This part outlines any protections the franchisee has against competition from other franchise units or operations owned by the franchisor within the designated territory.
- Territorial Restrictions: Information on any limitations placed on the franchisee regarding where they can sell or market the franchise’s products or services. This might include online sales restrictions or limitations on participating in certain events or venues.
- Modifications to Territory: Details on how and under what circumstances the franchisor can modify the franchisee’s territory.
- Other Rights and Restrictions: Any additional rights or restrictions related to the territory that the franchisee needs to be aware of, including rights to relocate the franchise or how territories are determined and potentially redrawn.
Compliance with the requirements for Item 12 (and all items of the FDD) is crucial for both franchisors and franchisees. For franchisors, non-compliance can lead to legal penalties, including fines and restrictions on the ability to sell franchises. For franchisees, understanding Item 12 is crucial for setting expectations regarding competition and the scope of operations, which directly impacts the potential success of the franchise.
Prospective franchisees should thoroughly review Item 12, consider how the territorial rights and restrictions align with their business goals and strategy, and consult with an attorney specializing in franchise law to navigate the complexities of these provisions.
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This article was researched and edited with the support of AI