One central benefit that franchisees seek from joining a franchise system is the leadership of the franchisor’s team. This team controls the brand standards, leads national marketing, gives advice and support, and is responsible for brand innovation and development.
Item 2 of the Franchise Disclosure Document (“FDD”) discloses to prospective franchisees who these leaders are and their business experience. Item 2 also discloses who is involved in franchise sales and operations. However, under the requirements of the FTC Franchise Rule, not every leader, manager, or salesperson needs to be included. The below lists summarize who needs to be included in Item 2 and who does not.
Who to Include in Item 2:
- Franchisor’s directors, even if they are not involved in the day-to-day company decisions
- Franchisor’s trustees
- Franchisor’s general partnersFranchisor’s principal officers (i.e. president, vice president, chief executive officer, chief financial officer, chief operations officer, chief marketing officer, etc.)
- People who will have management responsibility for (1) the operations of franchise system or (2) the sale of franchises. These people may be employed by the franchisor, a parent company, or one of the franchisor’s affiliates, such as the company the operates non-franchised locations. They may or may not have the title of a manager. If a prospective franchisee could rely on a person’s expertise, control, or authority in the decision to purchase a franchise, then the person needs to be disclosed. (Note that even though franchise brokers engage in franchise sales, they are not managers of the franchisor or its affiliates.)
Who Not to Include in Item 2:
- Franchise brokers. Franchise brokers are considered “franchise sellers” and are disclosed in Item 23 (the receipt page of the FDD), not Item 2.
- Managers of the franchisor, its parent, or its affiliates who are not going to manage franchise operations or franchise sales. Some examples may include a financial manager, corporate-store operators, or human resource managers.
- Other franchisor service providers like consultants, accountants, or outside counsel.
After each person is identified, the bulk of Item 2 is dedicated to presenting his or her previous 5 years of principal business experience. The descriptions are brief and not meant to be a resume. Rather, they simply help prospective franchisees to see how long the team members have been involved with the franchisor’s brand and the industry.
It is important to include all the relevant people in Item 2 because each person also needs to be evaluated when preparing Items 3 and 4 of the FDD. If the people in Item 2 have been involved with certain types of litigation or bankruptcy proceedings, then the FDD must include additional information.
Please reach out to Manning Fulton if you have further questions about who from your organization needs to be included in Item 2.