Franchise Restrictions and the FDD
Purchasing a franchise typically involves signing one or more franchise agreements. These agreements offer prospective franchisees a comprehensive view of the franchisor, their system, and the information new franchisees will need to make an informed decision. The Franchise Disclosure Document (FDD), in particular, describes in detail certain restrictions that a franchisee must follow, such as geographical territory, uniforms, marketing, branding, and even which suppliers they may use. These restrictions are binding requirements that any franchisee will have to abide by long-term, so it’s critical to consider whether you can do so before signing on.
Once a franchisor has received an application and agreed to consider it, they must by law provide an FDD Under the Federal Trade Commission’s Franchise Rule, prospective franchisees must be allowed at least 14 days to review the FDD before being asked to sign any contract or pay any money to the franchisor.
A careful review of the restrictions is a necessary part of the decision-making process. The FDD restrictions are set forth to protect the brand and everyone operating with those brand standards. As such, you as a franchise owner benefit when you and all other franchises abide by the restrictions set out in the FDD, or to use a common aphorism, ‘A rising tide lifts all boats.’
The main purpose for these restrictions is to ensure that the franchisor’s business model is followed with consistency and efficiency at each location. For example, employee uniforms are often a required part of the business, as well as part of the franchise brand. To maintain compliance and consistency in the look of their stores and employees, the franchisor may require each location to obtain their uniforms from a specified supplier. This information is typically found in FDD item 8. The same often goes for franchises in the food service industry, who want to maintain a certain level of food taste and quality from location to location. By requiring all franchisees to order supplies from the same suppliers, the franchisor can better achieve this consistency.
The FDD also spells out restrictions related to territory and soliciting customers. For example, in addition to specifying suppliers for all franchise owners, FDD Item 8 may also specify which goods or services a franchise location can offer for sale. FDD Item 12 is focused on territory, including where and to whom a franchisee may sell their product or service. Some franchise agreements will also describe how a franchisee may use the internet for sales purposes, and whether or not other franchisees can sell to customers within your territory.
Such guidelines are not meant to limit the success of a new franchise business. Quite the opposite. A franchisor may use restrictions for many reasons, most of which are geared toward helping a franchisee get their business up and running while using the franchisor’s proven business methods and standards.In fact, the intent of FDD restrictions is to prevent franchisees from doing anything to undermine their own chances for success, as well as the success of neighboring franchise owners. While some franchisees may want to do things their own way, the reality is that operating in compliance with their FDD offers a much better chance for long-term success. For this reason, understanding the intent and purpose behind a franchisor’s FDD restrictions, as well as the restrictions themselves, is an important part of making an informed franchise purchase.
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