A Proposal for a Mandatory Summary Franchise Disclosure ... · A Proposal for a Mandatory Summary...

A Proposal for a Mandatory SummaryFranchise Disclosure Document

Eric H. Karp and Ari N. Stern

In the arena of disclosure and registration, franchising has lost its way.

The prevention of fraud and abuse was the primarydriver behind the creation of the franchise disclosure re-gime at both the state and federal levels. The U.S. Fed-eral Trade Commission (FTC) issued the original fran-chising rule, “Disclosure Requirements and ProhibitionsConcerning Franchising and Business Opportunity Ven-tures” (the Franchise Rule), on December 21, 1978.1 Itdid so on the basis of its findings of widespread deceitfulpractices in the franchising industry, which had resultedin serious economic harm to consumers. Such deceptionwas particularly noted to exist with respect to misrepresen-tations concerning: (1) the opportunity, costs, and contrac-tual terms to which a potential franchisee would be sub-ject; (2) the success or lack thereof of the franchiseseller; (3) prior purchasers of the franchise opportunity;and (4) the franchise seller’s financial viability.2 A numberof the states that enacted franchise disclosure and/or reg-istration laws, most notably California, Maryland, Illinois,and New York, did so on the basis of similar findings.3

Mr. Stern

Mr. Karp

Eric H. Karp ([email protected]) is a partner at Witmer, Karp, Warner and Ryan,LLP in Boston. He primarily represents franchisee associations and franchisees, dealers, anddistributors. Ari N. Stern ([email protected]) is an attorney and mediator at the firm.

1. See 43 Fed. Reg. 59614 (Dec. 21, 1978).2. See Statement of Basis and Purpose, Disclosure Requirements and Prohibitions Concern-

ing Franchising, 16 C.F.R. 436 at 15445.3. For example, the legislative findings that supported enactment of the first state franchise

disclosure law (i.e., California in 1971) concluded that “California franchisees have suffered sub-stantial losses where the franchisor or his or her representative has not provided full and com-plete information regarding the franchisor-franchisee relationship, the details of the contract be-tween the franchisor and the franchisee, and the prior business experience of the franchisor.” SeeCalifornia Franchise Investment Law, CAL. CORP. CODE § 31001.

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A parallel purpose of franchise disclosure generally has been to providethe prospective franchise investor with the information needed to make aknowing, intelligent, and informed decision about whether to accept theoffer of a franchise opportunity. Indeed, the California Franchise InvestmentLaw states that one of its goals is to provide “each prospective franchiseewith the information necessary to make an intelligent decision regardingthe franchise being offered.”4 The Maryland Franchise Registration and Dis-closure Law, in a similar vein, states that one of its purposes is to “[g]ive eachprospective franchisee necessary information about any franchise offer.”5

And the Rhode Island Franchise Investment Act seeks to “. . . assure thateach offeree receives the information necessary to make an informed deci-sion about the offered franchise.”6

Two developments have undermined these objectives.First, these laudable goals of franchise disclosure have been eroded in

favor of franchise disclosure documents whose primary purpose is to protectthe franchise seller from liability arising from pre-sale statements and repre-sentations. This shift in priorities was in many ways signaled by the ThirdCircuit’s 1997 decision in Queen City Pizza, Inc. v. Domino’s Pizza, Inc.7 Al-though many properly interpreted this case as perhaps the death knell ofantitrust tying and monopolization claims in the franchise context, anotherimportant message was embedded in the court’s determination in favor ofthe franchisor.

In Queen City Pizza, the franchisees alleged that they suffered harm on ac-count of the franchisor’s requirement that they purchase ingredients, sup-plies, and materials from the franchisor or its approved vendors only.More specifically, the franchisees alleged that the these restrictions yieldedannual revenue to the franchisor of $450 million, and because these ingredi-ents and supplies were sold at a markup, in some cases as high as 40 percent,each of the 3,500 franchisees in the system paid between $3,000 and $10,000per year more for ingredients and supplies than they would have in an openand competitive market. The franchisees thus argued that the franchisor wassubject to liability under the Sherman Act for engaging in illegal tying andmonopolization.8

The Third Circuit ruled against the franchisees, noting, in part, that thelimitations on their purchasing choices were imposed by their contract andnot the overall marketplace. What this meant was that the franchiseeswere bound by their contract and the presale disclosure, which enabledthem, in the court’s eyes, to “assess the potential costs and economic risksat the time they signed the franchise agreement.”9 To put it another way,

4. See id.5. See MD. CODE ANN., BUS. REG. § 14-202(b)(1).6. See R.I. GEN. LAWS § 19-28.1–2.7. See Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430 (3d Cir. 1997).8. See generally id. at 433–35.9. See id. at 440.

542 Franchise Law Journal • Vol. 35, No. 4 • Spring 2016

the court was saying that the franchisor could impose commercially unrea-sonable prices on its captive franchisees, presumably without limit, andreap an enormous benefit, as long as it disclosed the right to control the sup-ply chain up front.

Other cases before and after Queen City Pizza also demonstrate that thedrafting of franchise disclosure documents, including franchise agreements,has evolved to the point of placing a greater emphasis on protecting franchi-sors than on protecting prospective investors. For example, the 1991 deci-sion in Scheck v. Burger King Corp.10 involved a franchise agreement thatdid not grant or impute exclusive territorial rights to the franchisee. Whenthe franchisor opened a competing location two miles away from the franchi-see’s location, a claim based on the implied covenant of good faith and fairdealing ensued. The court, in denying Burger King’s motion for summaryjudgment held that, although the plaintiff did not have an exclusive territory,he was entitled to an expectation that the franchisor would not “actively de-stroy the right of the franchisee to enjoy the fruits of the contract.”11 Thisdecision created a rush among franchisors to revise their franchise agree-ments, as well as Item 12 in their franchise disclosure documents, to fillthe void created by the apparent ambiguity in the Burger King franchiseagreement.

In short, the franchise disclosure document has, in recent times, growngreatly in length and complexity for the benefit of franchisors. The docu-ment now primarily serves to expand the control of a franchisor over its sys-tem, as well as to protect the franchisor from liabilities and claims.

A second and related development has been the material and marked in-crease in the sheer amount of information contained in a typical franchisedisclosure document. Such an increase in information makes the documentimpenetrable and intimidating to most potential franchisees. It is now notunusual for the entire franchise disclosure document, including all related at-tachments, to exceed 300 pages. In fact, it is not unheard of for a franchisedisclosure document to exceed 500 pages, or 7.5 pounds, of material.12

See a typical FDD on the next page.

10. See generally 756 F. Supp. 543 (S.D. Fla. 1991), on rehearing, 798 F. Supp. 692 (S.D. Fla.1992).11. See id. at 548.12. The March 21, 2015, franchise disclosure document of Taco Bell Corp., as filed with the

Minnesota Department of Commerce on March 30, 2015, contained 545 pages of material. Seehttps://www.cards.commerce.state.mn.us/CARDS/security/search.do?method=showPoup&documentId={E84CDED3-C1FD-43A9-9FAA-D32969BDB8DF}&documentTitle=186224&documentType=4 (last visited on Feb. 15, 2016). The May 1, 2015, franchise disclosuredocument of Doctor’s Associates, Inc., the franchisor of Subway, filed with the same agency onMay 1, 2015, contained 495 pages. See https://www.cards.commerce.state.mn.us/CARDS/security/search.do?method=show=Poup&documentId={E99599CD-3D33-411C-A551-7A1D93507E84}&documentTitle=194234&documentType=4 (last visited on Feb. 24, 2016).

A Proposal for a Mandatory Summary Franchise Disclosure Document 543

For these reasons, the authors now question whether “more is less,” frus-trating the goal of allowing a prospective franchisee to engage in meaningfuldue diligence and comparative shopping of franchise opportunities.

As the next review of the FTC Franchise Rule approaches, it is time topause and thoroughly examine the purposes and intent behind franchise dis-closure. To help restore franchise disclosure to its original mission, the au-thors propose the creation of a summary franchise disclosure document inorder to enable prospective franchisees to receive the information theyneed in a format that is user-friendly and informative. Our proposal also sug-gests that “less can be more.”

In making this proposal, the authors have looked to the securitiesindustry—and for good reason. In 2009, the Securities and Exchange Com-mission (SEC) issued a regulation that authorized the use of a separatesummary prospectus for mutual funds. Further, many of the state franchisedisclosure and registration statutes are modeled after securities laws.13

13. The Illinois statute is a typical example of state laws designed to get at the core of pre-venting fraudulent practices. It makes it unlawful for any individual to “directly or indirectly(a) employ any device, scheme, or artifice to defraud; (b) make any untrue statement of materialfact or omit to state a material fact necessary in order to make the statements made, in the lightof the circumstances under which they are made, not misleading; or (c) engage in any act, prac-tice or course of business which operates or would operate as a fraud or deceit upon any person.”See 815 ILL. COMP. STAT. ANN.§ 705/6.


These statutes have explicitly incorporated into their laws the provisions ofSEC Rule 10(b)(5), which is based upon the Securities Exchange Act of1934, § 10(b), 15 U.S.C. § 78(b).14

In addition, in part reflecting the genesis of franchise disclosure law andits relationship to securities laws and regulations, state franchise regulatorsin Connecticut, Hawaii, Indiana, Maryland, New York, North Dakota,Rhode Island, South Dakota, Virginia, Washington, and Wisconsin allwork in an office, bureau, or division within the securities agencies of theirrespective states.15 State officials, accordingly, recognize a strong parallel be-tween regulating securities and regulating franchising.

More importantly, the SEC, prior to enactment of its summary prospec-tus rule, conducted substantial research, including the use of focus groups, toassure that the use of a summary prospectus would add to, and not subtractfrom, the utility of the information provided to the typical investor. The au-thors believe that this research can be used as part of an administrative re-cord that would justify the creation of a new section in the FTC FranchiseRule on the same subject.16

Finally, the authors acknowledge that there is nothing in the current FTCFranchise Rule that would prohibit a franchisor from creating a summary ofits franchise disclosure document, or publicizing some, but not all, of the in-formation contained within its disclosure document, as long as there is noinconsistency between that information and the information contained inthe disclosure document.17 Such summaries or excerpts can already befound on websites of many franchisors.18 Our proposal would not onlymake a summary franchise disclosure document a mandatory and integralpart of the disclosure process, but would also carefully and specifically pre-scribe and limit what would be contained in such a summary document.

14. See 17 C.F.R. § 240.10b-5.15. WOLTERS KLUWER, CCH BUSINESS FRANCHISE GUIDE, Directory of Agencies ¶ 2010

(2010).16. During the process that led to the issuance of the amended FTC Franchise Rule on Jan-

uary 23, 2007, many franchisee advocates urged the agency to address post-sale relationship is-sues. In declining to do so, the FTC opined that the record of the administrative proceedings didnot yield adequate evidence to support a finding of prevalent actual practices that would meetthe statutory prerequisites for unfairness as articulated in the FTC Act. See Statement of Basisand Purpose, Disclosure Requirements and Prohibitions Concerning Franchising, 16 C.F.R. 436at 15447.17. Under 16 C.F.R. § 436.6(d), a franchisor may not include any materials or information in

the franchise disclosure document other than those that are specifically permitted by the FTCFranchise Rule or by a state law not preempted by the FTC Rule. On the other hand, a fran-chisor may provide information outside the franchise disclosure document as long as it doesnot contradict any of the information required to be disclosed in the disclosure document.See 16 C.F.R. § 436.9 (a).18. For example, the pizza franchisor, Papa John’s, has a section on its website providing in-

formation concerning the cost to build a shop, the standard franchise fee, the standard royaltyfee, the marketing and advertising fees, minimum financial requirements, and training provided.See http://www.papajohns.com/franchise/frequently-asked-questions-about-franchising.html(last visited on Feb. 15, 2016). See also the website of KFC, which has a similar set of disclosures,http://www.kfcfranchise.com/faqs-qsr-restaurant.php (last visited on Feb. 15, 2016).


In order to allow for a better appreciation of the relevance of the authors’proposal, the relevant background information is summarized as follows.

II. Franchising in the United States: An Overview

The first business format franchise appears to have started in the UnitedStates during the 1930s.19 Howard Johnson, the owner of a highly profitableice cream parlor, entered into a licensing deal under which an entrepreneurreceived the right to open an ice cream store that utilized Johnson’s lucrativebusiness model.20 Since this initial “franchising deal,” the concept of fran-chising has mushroomed. According to the International Franchise Associa-tion, franchising now permeates 300 different business format categories.21

To what extent, though, does franchising impact the U.S. economy andits overall vitality? Here is a snapshot of some of the statistics highlightedin Chapter 2 of The Franchise Guide on the website www.franchising.com:22

• An estimated 6,000 franchise companies operate in the United States.

• Seventy-five industries use franchising to distribute goods and servicesto consumers.

• Nearly 50 percent of all retail sales come through franchising.

• One in twelve businesses is a franchise.

• Over 300 franchises are sold every week. . . . [E]very 8 minutes of a typ-ical week, a new franchised business is started.

• 750,000 franchised businesses in the United States generate almost$1 trillion in sales each year.

The Franchise Guide goes on to explain that “franchises employ more than18 million people in the U.S. directly, and over 25 million indirectly.”23

Thus, to say that franchising has a substantial impact on the U.S. economy,without more, would be a material understatement. Franchising is a funda-mental component of the U.S. economy. And by all indications, franchisingwill grow well into the future.

A recent study of the U.S. franchise industry, focusing on data from 1,695businesses that ran franchise systems from 2010 to 2014, found that the fran-

19. See John M. Vernon, Franchising in the United States: Land of Opportunity, 2003 CONF. OF

INT’L BAR ASS’N 1 (Sept. 14–19, 2003), available at http://www.klgates.com/files/ tbl_s48news/pdfupload307/10346/franchisinginus_iba_conf_0919.pdf.20. See id.21. See Int’l Franchise Ass’n., FAQs About Franchising, http://www. franchise.org/faqs-about-

franchising (last visited Feb. 14, 2016).22. See Kerry Pipes, History of Franchising: Franchising in the Modern Age, FRANCHISING.COM,

http://www.franchising.com/howtofranchiseguide/history_of_franchising_part_two.html (lastvisited Feb. 14, 2016).23. See id.


chising sector grew by 3.8 percent.24 This finding, as well as the above sta-tistics, is bolstered by data in a 2015 report for the International FranchiseAssociation Educational Foundation, Franchise Business Economic Outlook for2015.25 The report predicted, in pertinent part, that in 2015, the numberof franchise establishments would increase by 1.6 percent.26 This is the iden-tical pace of growth found in 2014.27 The report also makes the followingconclusion: “The gross domestic product (GDP) of the franchise sectorwill increase by 5.1% to $521 billion in 2015. This will exceed the growthof U.S. GDP in nominal dollars, which is projected at 4.9%. The franchisesector will contribute approximately 3% of U.S. GDP in nominal dollars.”28

In short, more and more Americans and U.S. residents, especially those whoseek to operate as franchisees, will be impacted by the franchising industryfor years to come.

Although one of the most important goals of effective disclosure is to re-duce risk, there is no lack of risk in any franchise investment. Indeed, in2013, the Office of Inspector General of the Small Business Administration(SBA) conducted an analysis of three franchise systems with a high numberof SBA guaranteed loans.29 The agency reported that those three franchisesystems, Planet Beach, Petland, and Cold Stone Creamery, had received inthe aggregate more than 1,000 franchise loans during the period 2002–09 to-taling $199 million, 501 of which were defaulted, costing the agency $84million.30 Although the purpose of the report was to highlight the risk tothe SBA of guaranteed loans to franchisees, the risk to the borrowers cannotbe overlooked.

A broader view of the risks associated with SBA guaranteed loans was pro-vided by a 2013 report of the U.S. Government Accountability Office.31

From 2003 to 2012, the SBA guaranteed 32,323 franchise loans totaling ap-proximately $10.6 billion. Due to defaults, the SBA was required to makepayments on 28 percent of those loans at a cost to the taxpayers of approx-imately $1.5 billion.32

24. See Jeff Lefler, U.S. Franchise Industry Grows 3.8% in Four Years, FRANCHISING USA(Oct. 2, 2014), http://www.franchisingusamagazine.com/expert-advice/u-s-franchise-industry-grows-3-8-four-years/.25. See generally IHS ECONOMICS, Franchise Business Economic Outlook for 2015, INT’L FRAN-

CHISE ASS’N EDUC. FOUND. ( Jan. 2015), http://emarket.franchise.org/FranchiseBizOutlook2015.pdf.26. See id. at 1.27. See id.28. See id.29. See U.S. SMALL BUS. ADMIN., OFFICE OF INSPECTOR GEN., THE SBA’S PORTFOLIO RISK

MANAGEMENT PROGRAM CAN BE STRENGTHENED ( July 2, 2013), https://www.sba.gov/sites/default/files/Audit%20Evaluation%20Report%2013-17%20The%20SBA’s%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf.30. See id. at 3.31. See U.S. GOV’T ACCOUNTABILITY OFFICE, SMALL BUS. ADMIN., REVIEW OF 7(A) GUARAN-

TEED LOANS TO SELECT FRANCHISEES (Sept. 2013), http://www.gao.gov/assets/660/657723.pdf.32. See id. at 1.


A report issued by FranchiseGrade.com on 1,695 franchise systems statesthat between 2010 and 2013, franchisees invested an estimated $59.4 billionin franchised outlets. During that same period, 135,289 new franchised loca-tions opened, but 118,645 turned over, meaning that they were terminated,reacquired by the franchisor, not renewed, ceased operations, or sold toother franchisees.33

Of course, complete failure of the business is not the only risk associatedwith investing in a franchise opportunity. These risks include a relationshipwith the franchisor as well as financial results, which are less than those ex-pected. In its 2015 survey of franchisees, Franchise Grade.com reported that42 percent of respondents were dissatisfied or very dissatisfied as a franchiseeand that 64 percent would not recommend that friends or family invest in thefranchise system in which they were operating.34

The question must therefore be asked: do potential franchisees, more than30,000 of whom open new franchised locations each year, really understandwhat they are getting into before investing in a franchise system?

III. Potential Franchisees Have Difficulty MakingWell-Informed Decisions

As previously noted, federal law requires a franchisor to provide potentialfranchisees with a franchise disclosure document (FDD).35 Each FDD is tocontain information on twenty-three topics, known as “Items,” with respectto the franchise opportunity.36 Further, the FDD must be in plain English.37

Notwithstanding these requirements, FDDs are typically quite cumber-some and can be hundreds of pages filled with legalese making the presenta-tion of information convoluted. Because of this, many believe that potentialfranchisees do not fully understand the contents of a FDD. For example, the2014 Franchise Grade Franchise Expert Survey found that an astounding84 percent of survey takers believed that potential franchisees “sometimes,

33. See Industry Statistics, FRANCHISEGRADE.COM, http://www.franchisegrade.com/index.php/resource-tools/industry-statistics/ (last visited Feb. 25, 2016).34. See National Survey of Franchisees 2015: An Analysis of National Survey Results,

FRANCHISEGRADE.COM 8 (2015), http://franchisegrade.com/ctw/Nat-Survey-Franchisees-2015.pdf. The risks associated with a franchise investment are not just directly financial, but also relateto the unique culture in each franchise system. The survey reported that 46 percent of respon-dents answered in the affirmative to at least one of the following questions: “(a) My franchisorhas indicated that there could be negative consequences to participating in a franchisee associ-ation, (b) My franchisor has indicated that there could be negative consequences to speaking outabout problems within the franchise system, or (c) My franchisor has increased the frequency ofinspections or evaluations of my business after I raised questions or spoke about problems in thesystem.” See id. at 22.35. See generally 16 C.F.R. 436 and 437.36. See id.37. See id.


rarely, or never” understood the FDD that they were given.38 That belief isbuttressed by logical reasoning, empirical evidence, and common sense.

For starters, new franchisees generally have no experience in owning abusiness, whether a franchise or another entity.39 Franchising generallydraws people who want to own a business and believe that the way to mini-mize the risk of failure is to work with a franchisor that will provide a repu-table system, strategic counsel, detailed operations plans, continuous advice,and training for success.40 Yet, a 2013 Albany Law Review article highlighted astudy by Kimberly Morrison finding that 80 percent of the sample of franchi-sees, which hailed from forty-six states, had never owned a business beforejoining the franchise system.41 Another study by Alden Peterson and RajivDant, which was also highlighted in the Morrison article, found that only6.7 percent of a particular sample had owned an independent business beforebecoming franchisees.42 These statistics strongly underscore the lack ofknowledge and business insight possessed by potential franchisees.

Secondly, potential franchisees, by virtue of that lack of knowledge, expe-rience, and business insight, tend to avoid the “difficult work” of digesting anFDD and engaging in other investigative activities.43 As the authors of theAlbany Law Review article noted, potential franchisees “face significant cog-nitive obstacles when attempting to consider all of the relevant informationbefore acquiring ownership of a franchise unit. More specifically, the novicefranchisee will face three cognitive obstacles: the unawareness problem,screening difficulty, and comprehension limitations.”44 The authors proceedto cite various studies in support of their conclusions.45 For example, theMorrison study found that “most franchisees ignored the franchise disclo-sure documents before investing in [a] franchise.”46 The study also foundthat “most franchisees did not consult with a lawyer before the signing ofthe franchise contract.”47

Recognizing these realities, it is imperative that more be done to enableand empower potential franchisees to make an educated decision before in-vesting in a franchise system.

38. See 2015 Franchise Grade Franchise Expert Survey, FRANCHISEGRADE.COM 11 ( Jan. 2015),http://www.franchisegrade.com/wp-content/uploads/2014/12/Franchise-Expert-Survey.pdf.39. See Robert W. Emerson & Uri Benoliel, Are Franchisees Well-Informed? Revisiting the De-

bate over Franchise Relationship Laws, 76 ALB. L. REV. 193, 203 (2013).40. See id. at 203–05.41. See id. at 206–07. In its 2015 survey of franchisees, Franchise Grade.com reported that

63 percent of respondents stated that they had never before owned any type of business beforeinvesting in their franchised business.42. See id. at 207–08.43. See id. at 209.44. See id. at 210.45. See generally id. at 213–15.46. See id. at 213.47. See id.


IV. The Motivation for a Summary Disclosure Document

For almost fifty years, practitioners and academics have recognized a“connection” between securities and franchising.48 It is this “connection”that underlies and motivates our proposal. There is no reason that good pub-lic policy in the securities realm cannot be applied to the world of franchis-ing, and vice versa. The authors submit that the SEC’s summary prospectusrule is one such directive that merits serious consideration.

The summary prospectus rule is succinctly summarized in the followingpassages of an informative note49 drafted by then law student and now attor-ney Sarah Zimmer:

The newly adopted rule grants mutual funds the option to satisfy prospectus de-livery obligations under section 5(b)(2) of the Securities Act of 1933 (“SecuritiesAct”) by providing investors with a summary of key information . . . while postingadditional information—including the statutory prospectus—on the Internet. Thesummary prospectus is a streamlined disclosure document that contains key in-vestment information in plain English and in a standardized order. All mutualfund companies [are] required to replace the current Risk/Return Summary lo-cated at the beginning of the statutory prospectus with the newly adopted sum-mary prospectus. If funds choose to disseminate the summary prospectus as astand-alone, preliminary disclosure document, the statutory prospectus must bemade available on funds’ websites and sent to investors upon their request . . .50

The SEC’s new rule creates a distinct layered approach to disclosure whereby inves-tors are given key information up front and later provided with more detailed infor-mation upon request. The foundation of the initiative is the user-friendly, stream-lined summary prospectus. Every prospectus will be required to incorporate asummary section at the beginning of the document. It is important to note that atthis time, mutual funds will not be required to create a separate summary prospectus;however, they must include the summary section in the beginning of the statutoryprospectus. The summary section will contain information identified by the SECas central to making an investment decision. If a fund chooses to rely on a summaryprospectus to meet its Securities Act prospectus delivery obligations, the amend-ments provide that the fund’s current statutory prospectus . . . [and certain other ma-terials] be made available, free of charge, at a web address specified in the summaryprospectus. Moreover, mutual funds may satisfy delivery obligations under the Secu-rities Act by sending “key information” to investors via a summary prospectus. Intheory, the summary prospectus is to be supported by the statutory prospectus,which must be available online and sent to investors upon their request.51

Importantly, this pragmatic rule was not created out of thin air. It was devel-oped after much “trial and error” by the SEC, and as noted above, after thefederal government conducted many focus groups to carefully and method-ically study the matter.

48. See, e.g.,George D. Kappus, Jr., The Franchise as a Security: Application of the Securities Lawsto Owner–Operated Franchise, 11 B.C. L. REV. 228 (1970).49. See Sarah B. Zimmer, Note: Securities and Exchange Commission’s Enhanced Disclosure and

New Prospectus Delivery Option for Registered Mutual Funds, 83 ST. JOHN’S L. REV. 1431 (2010).50. See id. at 1432 (internal citations deleted).51. See id. at 1442 (internal citations deleted).


More specifically, with regard to its “trials and errors,” the SEC spentover twenty years on different initiatives to make the disclosure of informa-tion more consumer friendly.52 This includes, for example, the 1983 initia-tive to streamline the final prospectus and the 1998 adoption of SecuritiesAct Rule 498 that applied a type of summary prospectus to the mutualfund industry. With each of these initiatives, the SEC got closer and closerto a model that would provide consumers with legible information that theyneeded (and deserved). The SEC’s “trials and errors,” accordingly, would beincluded in an administrative record that supports the proposed summarydisclosure document rule.

Such an administrative record would also include qualitative data from thefocus groups that the SEC ran in connection with the summary prospectusrule. Indeed, the federal government’s effort to solicit consumer feedbackculminated in the drafting of a twenty-eight page paper on the matter.53

The qualitative data contained in this report, in many respects, can be ap-plied to the world of franchising. For example, the report noted that partic-ipants liked the shorter prospectus. It states the following: “Essentially, par-ticipants thought it could be used as a screening tool to identify mutual fundsin which they might be sufficiently interested to do some additional review.The language seemed easier to understand and the font was larger than inthe long-form prospectus.”54 The report also indicates that focus group par-ticipants regarded the short form prospectus as “a tool in determiningwhether or not to pursue additional research about a given fund.”55

Potential franchisees, no different from mutual fund investors, need cer-tain legible information in a uniform summary format in order to make in-formed choices. Thus, certain qualitative data points, especially with regardto the presentation and types of information, are applicable here.

V. Proposed Summary Franchise Disclosure Document

Appendix A contains the text of a proposed addition to the FTC Fran-chise Rule that would mandate the furnishing of a summary franchise disclo-sure document.

Appendix B contains a sample summary franchise disclosure documentbased on the proposed rule.

Here are the highlights of the proposal:

A. Format: The main franchise disclosure document must be provided atthe same time as the summary franchise disclosure document. This is amaterial departure from the SEC mutual fund rule, which permits the

52. See generally Joseph A. Franco, A Consumer Protection Approach to Mutual Fund Disclosureand the Limits of Simplification, 15 STAN. J.L. BUS. & FIN. 1, 23–32 (2009).53. See ABT SRBI INC., FINAL REPORT: FOCUS GROUPS ON A SUMMARY MUTUAL FUND PROSPEC-

TUS (May 2008), https://www.sec.gov/comments/s7-28-07/s72807-142.pdf.54. See id. at 5.55. See id. at 6.


issuer of a summary prospectus to direct the investor to a website inorder to obtain the main prospectus. The authors believe this will pro-vide greater protection to the prospective investor. The proposed rulerequires the documents to be furnished as a package, with each sectionheading in the summary disclosure document acting as a hyperlink tothe corresponding section in the main disclosure document. In addi-tion, the summary disclosure document would not be bundled withany document other than the disclosure document, and nothingother than the disclosure document would be incorporated by refer-ence into the summary disclosure document. The goal is to allow aprospective franchisee to electronically move back and forth betweenthe two documents with ease.

B. Manner of Delivery: If furnished by email by sending a link to the sum-mary disclosure document and the disclosure document on the Inter-net, the link would send the recipient directly to the summary disclo-sure document; the email would be required to disclose how long thelink will be usable and must encourage the recipient to access and savethe document in order to retain it. If furnished through a website, theWeb address must send the prospective franchisee directly to the sum-mary disclosure document and to the disclosure document and not tothe home page or other section of the franchisor’s website.

C. Format: Both the summary disclosure document and the franchise dis-closure document must be in human readable format, capable of beingprinted on paper. The recipient must be able to permanently retain,without charge, electronic versions of both disclosure documents informats that are convenient for both reading online and printing onpaper.

D. Length: The summary disclosure document would be limited to fivepages in length and 1,500 words using 12-point type throughout.The sample summary disclosure document at Appendix B contains1,284 words. Disclaimers, footnotes, or other similar information typ-ically contained in the disclosure document would not be permitted inthe summary disclosure document. These restrictions are intended tomake the summary disclosure document user-friendly.

E. Newly Required Disclosures: The summary franchise disclosure docu-ment would include a significant amount of information not currentlyrequired to be disclosed under the FTC Franchise Rule. The goal ofthis article is primarily to elucidate the benefits of a summary franchisedisclosure document, but the authors do not assume that such a sum-mary franchise disclosure document would be based on the currentFTC Franchise Rule. These new disclosures include:


1. The identity of the principal owner of the franchisor;

2. Identification of the principal competitors of the products and ser-vices offered by franchise system;

3. Median initial investment over the first twelve months ofoperation;

4. The length of time that the typical franchised business takes toachieve breakeven status;

5. Median gross revenue of all franchised outlets during the firsttwelve months of operation;56

6. The percentage increase or decrease in same-store sales on a year-over-year basis;57

7. Working capital required over the first twelve months ofoperation;

8. A prohibition on the use of the word “renewal” unless the franchi-see is permitted to continue the franchise relationship on the sameterms and conditions;

9. Specific risk-based disclosures concerning the supply chain, terri-tory, minimum royalties or minimum gross sales, pricing restric-tions, the presence or absence of limits on additional investmentrequired by franchisees,58 and any requirements for personal guar-antees by spouses or other persons;

56. In its report, the U.S. Government Accountability Office (GAO) highlighted the fact thatthose franchisors that do include a financial performance representation in Item 19 of their dis-closure document typically provide data only for units open one full year as of the end of its mostrecent fiscal year. The GAO found that revenues reflected in the FDDs of the particular fran-chise organization that was the subject of the report were on average 143 percent of the averagerevenue of the franchisees in that system over a ten-year period. SeeU.S. GOV’T ACCOUNTABILITY

OFFICE, supra at 31. Franchisees seeking SBA guaranteed loans are required to include first-yearrevenue estimates in their loan applications. Yet, that information is not available in the typicalFDD. See id. at 21.57. The Form 10-K filed by McDonald’s Corporation on February 25, 2016, provides same

store sales and same store guest counts for the previous three years. According to that report,same-store sales increased (or declined) by 0.5 percent, (2.1 percent), and (0.2 percent) respec-tively. Same-store guest counts declined by 3.1 percent, 4.1 percent, and 1.6 percent during thesame years. This is certainly important information for a franchise investor. See http://www.sec.gov/Archives/edgar/data/63908/000006390816000103/mcd-12312015x10k.htm. As of March 1,2016, 100 shares of McDonald’s Corporation stock cost approximately $11,900. See Yahoo! Fi-nance, http://finance.yahoo.com/q?s=MCD&ql=0 (last visited Mar. 1, 2016). The investmentrequired to open a new U.S. McDonald’s franchised location ranged from a low of $944,352to a high of $2,172,045. See http://www.aboutmcdonalds.com/mcd/franchising/us_franchising/acquiring_a_franchise/new_restaurants.html (last visited on Mar. 5, 2016).58. FranchiseGrade.com reported in its 2015 survey that 58 percent of respondents were re-

quired to make major investments into equipment, facility renovations, or other capital invest-ments in their franchised business. Of those respondents, 31 percent reported that those capital


10. Mandatory financial performance representations of franchisedbusinesses in the system as to gross revenue and net profit forthe immediately preceding five years,59 including definitions of“gross revenue” and “net profit”;

11. Disclosures concerning franchised and company-owned outletsover a five-year period, including a definition of “company-owned outlets”; and

12. The turnover rate of both franchised and company-owned outletsover the preceding five years, including a definition of “turnoverrate.”

The authors believe that each of these additional disclosures:(1) are necessary in order to achieve the purposes and goals of fran-chise disclosure, (2) would be based on information readily availableto most franchisors, (3) form a standard part of due diligence in anycommercial transaction outside of franchising, and (4) are routinelydisclosed in securities filings of publicly held franchisors.60

F. Averages: The summary disclosure document calls for the use of a me-dian. The authors believe that the use of a median is a more meaning-ful and accurate measurement than the “mean” of a data set. After all,one or more outlying data points could, in certain circumstances, un-fairly impact the mean and mislead a potential franchisee.61 “Median”is defined as the midpoint of the range of the values indicated.

G. Reasonable Basis: The summary disclosure document proposal expandsthe concept of reasonable basis, currently only found in the FTCFranchise Rule with respect to the financial performance disclosuresrequired in Item 19.62 The proposal requires the franchisor to havea reasonable basis and written substantiation available for each andevery disclosure made in the summary disclosure document and in

investments improved their business results and 49 percent stated that there was no improve-ment. Seventy-six percent of overall respondents reported that there had been material changesin operating manuals or procedures that have increased operating costs without an offsetting in-crease in revenues. See National Survey of Franchisees 2015: An Analysis of National Survey Results,supra note 34, at 17 and 21.59. The McDonald’s Corporation Form 10-K provides selected financial data for the previ-

ous six years.60. A more specific and detailed explanation of and justification for each of these additional

disclosures is beyond the scope of this article.61. Notice of Request for Comments Regarding Proposed NASAA Franchise Commentary

on Financial Performance Representations 19.15 (Item 19–Averages) (Oct. 1, 2015), availableat http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2015/10/FPR-Commentary-Request-For-Comments.pdf.62. See 16 C.F.R. § 436.5(s)(3).


the disclosure document. In our view, there is no reason not to applythis core reliability standard to every element of the disclosure docu-ment. If a franchisor does not have a reasonable basis or written sub-stantiation, the disclosure should not be made.

H. Use of Charts: The use of charts is extensive throughout the summarydisclosure document in order to present information in a readable andorganized context. All of the charts in the summary disclosure docu-ment must be derived from information required to be disclosed inthe disclosure document. The use of charts also conserves space andadvances the goal of having a document which does not exceed fivepages in length.

I. Contents: The content of the Summary Disclosure Document is lim-ited to nine sections, all of which must be presented in the orderand in the form described in the proposed Rule. These twelve sectionsare as follows:

I. The Franchisor and the Franchise Business

II. Litigation Matters

III. Fees and Charges

IV. Your Total Estimated Investment–12 Months

V. Principal Trademarks

VI. Term, Successor Franchise, and Transfers

VII. Provisions Affecting Profitability and Value of the FranchisedBusiness

VIII. Franchisee Median Financial Performance

IX. Franchised Outlets

X. Company-Owned Outlets

XI. Franchisor Balance Sheet-Selected Items

XII. Franchisee Associations

V. Conclusion

The time has come for franchise disclosure to restore its original missionby pursing two distinct but related goals. First, to present user-friendly dis-closure documents that focus on investor education and information, facili-tating due diligence and marked by the use of technology of the kind that


prospective investors expect in the twenty-first century. Second, to return tothe roots of franchise disclosure so that the disclosure document serves theinterests of the investor more than that of the issuer. It is our hope thatthis proposal will spark a spirited debate and lead to the adoption of a sum-mary disclosure document as part of the next generation of the FTC Fran-chise Rule.


Summary Franchise Disclosure Document

Worldwide Pizza Franchising, Inc.

1000 Main StreetBoston, Massachusetts

www.worldwidepizzafranchising.comApril 30, 2016

Our Franchise Disclosure Document (FDD) dated March 15, 2016 isincorporated by reference into (legally made a part of ) this SummaryFranchise Disclosure Document. Before you invest in this franchise,we strongly recommend that you review this complete Summary Fran-chise Disclosure Document and also review the complete FDD, whichcontains more detailed and important information about the franchiseand its risks. Each of the section headings in this Summary FranchiseDisclosure Document is a hyperlink that will take you directly to therelevant Item of the FDD.

I. The Franchisor and the Franchise Business

The franchised business will sell at retail pizzas, calzones, subs, salads, andother similar menu items in a distinctive decor.

We are a Delaware limited liability company formed on January 1, 2005. Wefirst offered franchises on March 31, 2006.

Our principal owner is ABC Investments, Inc., a private equity firm locatedat 100 Central Avenue, Chicago, Illinois 60609. ABC Investments, Inc. hasinvestments in the following franchise brands: Worldwide Sub Franchising,Inc. and International Chicken Franchising, Inc.

The following brands are the principal competitors of the franchise system:Pizza Hut, Domino’s Pizza, Papa John’s International, Little Caesar’s Pizzaand Papa Murphy’s International.

The median total investment over the first 12 months of the operation of thefranchised business is $400,000. Newly developed franchised businesses takeon average 14 months to break even before owner compensation. Mediangross revenue for the first 12 months of operation of franchised businessesopened in 2014 averaged $295,000. In 2015, our same outlet gross revenueby franchisees decreased year over year (YOY) by 1.2 %.

This Summary Franchise Disclosure Document and the accompanyingFDD contain information, including information about risks, that youshould know before investing in this franchise offering. Please readboth documents before you invest and keep them for future reference.This franchise offering has not been approved or disapproved by anyfederal or state agency. Any representation to the contrary is a criminaloffense. This franchise investment is not insured and may lose value.


II. Litigation Matters

Year Pending Resolved Filed Against Franchisees

2015 4 5 3

2014 4 5 6

2013 3 2 5

III. Fees and Charges

To Whom Payment Is To BeMade

Type of Fee Amount

Payable to Franchisor

Royalty 4% of Gross Revenue

Advertising Fund 3% of Gross Revenue

Co-op 2% of Gross Revenue

Transfer $5,000

Technology $200/month

Successor Franchise $15,000

Payable to Third Parties

Local Spend 1% of Gross Revenue

Accounting Actual Cost

Mystery Shopper Actual Cost

IV. Your Total Estimated Investment–First 12 Months

Fee or Expense Median Amount

Initial Franchise Fee $35,000

Other Amounts Payable to Franchisor $25,000

Amounts Payable to Third Parties $275,000

Working Capital–First 12 Months $65,000

Total Investment–First 12 Months $400,000

V. Principal Trademarks

Mark Date Registered Owner Contests/Claims

January 15, 2009 Franchisor None

Worldwide Pizza March 25, 2010 Franchisor None

PizzaWorld March 25, 2010 Affiliate None


VI. Term, Successor Franchise and Transfer

Initial Term 10 Years

Successor Franchise Term(s) Two 5 Year Terms

Conditions to Obtaining aSuccessor Franchise

You must sign the then current franchise agreement,which may contain increased or new fees andcharges and materially different terms, conditionsand obligations; pay the successor franchise fee;refurbish the franchised business; and execute arelease of claims in favor of the Franchisor.

Conditions to ObtainingApproval of a Transfer

Your buyer must sign the then current franchiseagreement, which may contain increased or newfees and charges and materially different terms,conditions and obligations; pay the transfer fee;refurbish the franchised business; and execute arelease of claims in favor of the Franchisor.

VII. Provisions Affecting Profitability and Value of the FranchisedBusiness

a. Supply Chain. You must purchase all or nearly all of the inventory,equipment, and supplies that you need to operate your business fromus, our affiliates, or suppliers designated by us and at prices we orthe supplier set. These prices may be higher than prices you could ob-tain elsewhere for the same or similar goods or services.

b. Territory. You will not receive an exclusive territory. You will be sub-ject to competition from us and our affiliates, possibly from other fran-chised or company owned outlets in close proximity to your franchisedbusiness.

c. Minimums. You must make minimum royalty or advertising paymentsregardless of your sales levels. You must maintain minimum sales per-formance levels. You must make inventory and supply purchases atspecified minimums and/or maintain minimum inventory on hand,even if you do not need inventory at that level. Your inability tomeet these minimums may result in termination of your franchiseand loss of your investment.

d. Pricing. You must comply with minimum and/or maximum prices setby us for the goods and services that you sell. You must also participatein any promotional pricing established by us. These requirements mayreduce your anticipated revenue and profit.


e. No Limit on Additional Investment. There are no limits on our abil-ity to require you to make additional capital investments in your fran-chised business.

f. Guarantees. You will and your spouse will be required to sign a docu-ment that makes both of you liable for your financial obligations underthe franchise agreement, even if your spouse has no ownership interestin the business. This guarantee will place both your and your spouse’smarital and personal assets, including your house, at risk if your fran-chise fails.

VIII. Franchisee Median Financial Performance

Year Gross Revenue YOY +/- % Net Profit % of GrossRevenue

YOY +/- %

2015 $445,300 (1.2%) $37,850 8.5% (8.1%)

2014 $450,500 5.9% $41,200 9.1% 18.2%

2013 $425,125 3.0% $34,850 8.2% 5.9%

2012 $412,600 1.9% $32,900 7.9% 13.1%

2011 $404,700 2.6% $29,100 7.2% 6.5%

IX. Franchised Outlets

Year Outlets YOY +/- YOY +/- % Turnover % Transfers Sold NotOpen

2015 225 25 12.5% 11% 8 40

2014 200 50 33.3% 8% 11 30

2013 150 45 39.1% 1% 5 17

2012 115 35 35.0% 3% 7 9

2011 100 15 26.3% 4% 3 6

X. Company Owned Outlets

Year Outlets YOY +/- YOY % Turnover % From (To) Franchisees

2015 85 10 13.3% 1% 1

2014 75 25 50% 0% (2)

2013 50 5 9.1% 0% (4)

2012 55 (5) (11.1%) 7% 3

2011 45 5 5.9% 11% 4


XI. Franchisor Profit and Loss Statement-Selected Items ($000)

Year 2015 2014 2013

Royalties $3,790 $3,060 $2,250

Initial Franchise Fees 875 1,750 1,575

Franchisee Purchases 1,500 1,350 956

Total Revenue $43,500 $39,900 $26,030

Expenses-Franchisee Purchases 100 90 75

Total Expenses $41,065 $37,950 $24,705

Net Income $2,435 $1,950 $1,325

YOY % Increase (Decrease) 24.8% 47.1% 26.8%

XII. Franchisor Balance Sheet-Selected Items ($000)

Year 2015 2014 2013

Current Assets $310 $285 $215

Current Liabilities 295 305 200

Working Capital 15 (20) (15)

Intangible Assets 50 45 35

Total Assets 425 365 295

Long-Term Debt 65 65 65

Total Liabilities 375 385 335

Owners’ Equity 50 (20) (40)

YOY Increase (Decrease) $70 $20 $10

XIII. Dispute Resolution

Governing Law Massachusetts

Venue Boston, Massachusetts

Arbitration/Litigation American Arbitration Association–singlearbitrator

Damages Punitive and multiple damages waived by youand us

Legal Fees and Costs Prevailing party recovers all fees and costs

Class Action/Consolidation Prohibited

Shortened Limitation ofClaims

One year from when the cause of action accrues

Royalties After Termination To the end of the term, discounted for presentvalue

Noncompetition Provisions Two years following termination; five-mileradius


IX. Franchisee Associations

The following franchisee association is endorsed by us and acts as the desig-nated representative of our franchisees:

Independent Association of Worldwide Pizza Franchisees, Inc., John Smith,President, 501 Maple Avenue, Kansas City, Missouri, 1-800-555-6666, [email protected], www.IAWPF.com


Title 16 Commercial Practices

PART 436—Disclosure Requirements and Prohibitions ConcerningFranchising

Subpart C—Contents of a Disclosure Document

§ 436.3A Summary Disclosure Document

a) General Instructions

1. Use 12-point type throughout the summary disclosure document.

2. The summary disclosure document may not exceed five (5) pagesin length and 1,500 words.

3. Make each section heading a hyperlink to the applicable Item ofthe disclosure document. The prospective franchisee must beable to move directly back and forth between the summary disclo-sure document and the disclosure document.

4. Furnish the summary disclosure document at the same time as thedisclosure document, both in an electronic format, which allowsthe use of hyperlinks between the summary disclosure documentand the disclosure document.

5. The summary disclosure document and the disclosure document(a) must be presented in a format that is human-readable and capa-ble of being printed on paper in human-readable format; (b) maynot bound together with any materials other than the disclosuredocument; and (c) may not incorporate by reference any materialsor any information other than the disclosure document.

6. This recipient of the summary disclosure document must be ableto permanently retain, free of charge, an electronic version ofthe summary disclosure document in a format, or formats, thatare convenient for both reading online and printing on paper.

7. If the summary disclosure document is furnished by email by sendinga direct link to the document on the Internet, the document must bedirectly accessible through the link from the time that the email issent through the date that is six months after the date that theemail is sent and the email must explain how long the link will beremain usable and that, if the recipient desires to retain a copy ofthe document, he or she should access and save the document.

8. If the summary disclosure document is furnished through a Website, the Internet Web site address must be specific enough tolead the prospective franchisee directly to the summary disclosure


document and to the disclosure document, rather than to the homepage or other section of the Web site of the Franchisor on whichthe materials are posted.

9. Do not use disclaimers, footnotes, or other similar informationcontained or required to be contained in the disclosure document.

10. The summary disclosure document calls for the use of a median.The use of a median is a more meaningful and accurate measure-ment than the “mean” of a data set because, for example, one ormore outlying data points could, in certain circumstances, unfairlyimpact the mean and mislead a potential franchisee. For the pur-poses of the summary disclosure document, “median” is definedas the midpoint of the range of values indicated.

11. The franchisor must have a reasonable basis and written substan-tiation for each and every disclosure made in the summary disclo-sure document and in the disclosure document.

12. No disclosure made in the summary disclosure document shallcontradict or vary from the same or similar disclosure in the dis-closure document.

b) Cover Page. Begin the summary disclosure document with a coverpage, in the order and in the form as follows:

1. The title “Summary Franchise Disclosure Document” in initial cap-ital letters and bold type.

2. The franchisor’s name, principal business address, primary Internethome page address and the date of the summary disclosuredocument.

3. A sample of the primary business trademark that the franchisee willuse in the business.

4. The following statement in bold type: Our Franchise DisclosureDocument (FDD) dated _______ is incorporated by referenceinto (legally made a part of ) this Summary Franchise Disclo-sure Document. Before you invest in this franchise, we stronglyrecommend that you review this complete Summary FranchiseDisclosure document and also review the complete FDD,which contains more detailed and important informationabout the franchise and its risks. Each of the section headingsin this Summary Franchise Disclosure Document is a hyperlinkthat will take you directly to the relevant Item of the FDD.

5. Information required by subsection (c)-Section I, infra.


6. The following statement at the bottom of the cover page in boldtype:This Summary Franchise Disclosure Document and the ac-companying FDD contain information, including informationabout risks, that you should know before investing in this fran-chise offering. Please read both documents before you investand keep them for future reference. This franchise offeringhas not been approved or disapproved by any federal or stateagency. Any representation to the contrary is a criminal offense.This franchise investment is not insured and may lose value.

c) Section I. The Franchisor and the Franchise Business. Disclose:

1. The business the franchisee will conduct.

2. The type of business organization used by the franchisor, the dateon which it was organized, and the state in which it was organized.

3. The date on which the franchisor first offered franchises providingthe type of business the franchisee will operate.

4. The name and address of the ultimate principal owner or ownersof the franchisor.

5. A description of other brands or lines of business owned, operated,or franchised by such principal owner or its affiliates.

6. The names of the top five competitors of the business the franchi-see will operate. For the purposes of this disclosure, use informa-tion derived from publicly available sources.

7. The median estimated total investment over the first twelve (12)months of operation of the business the franchisee will operate.

8. The average length of time franchises of the type that will be op-erated by the franchisee take to reach break even.

9. The median gross revenue of all franchises over the first twelve(12) months of operation.

10. The increase or decrease, expressed as a percentage, in year-over-year (YOY) same outlet gross revenue of franchised outlets in themost recent fiscal year of the franchisor from the previous fiscalyear, in each case with respect to outlets open during the entire fis-cal year.

d) Section II. Litigation Matters. Disclose in the following tabular form asummary of litigation matters required to be disclosed in Item 3 ofthe disclosure document. State the title “Litigation Matters” in initialcapital letters using bold type.


Table IILitigation Matters

Column 1Year

Column 2Pending

Column 3Resolved

Column 4Filed Against Franchisees

2015

2014

2013

1. In column 1, state the last three fiscal years.

2. In column 2, state the number of litigation matters pending at theend of each fiscal year.

3. In column 3, state the number of resolved litigation matters at theend of each fiscal year.

4. In column 4, state the number of franchisor-initiated litigation mat-ters commenced in each fiscal year.

e) Section III. Fees and Charges. Disclose in the following tabular form asummary of other fees and charges required to be disclosed inItem 6 of the disclosure document. State the title “Fees and Charges”in initial capital letters using bold type.

Table IIIFees and Charges

Column 1To Whom Payment Is To

Be Made

Column 2Type of Fee

Column 3Amount

Row 1 Payable to Franchisor

Row 2 Payable to Third Parties


1. In column 1, state to whom the payment is to be made.

2. In column 2, row 1, list each type of fee or charge required to bedisclosed in Item 3 and which is payable to the franchisor or its af-filiates, to a supplier in which an officer of the franchisor owns aninterest, or that the franchisor imposes or collects in whole or inpart for a third party.

3. In column 2, row 2, list each type of fee or charge required to bedisclosed in Item 3 and which is payable to a third party.

4. In column 3, state the amount of the fee.

f ) Section IV. Your Total Estimated Investment-First 12 Months. Disclose inthe following tabular form a summary of the franchisee’s estimated in-vestment over the first 12 months of operation based on the informa-tion required to be disclosed in Item 7 of the disclosure document.State the title “Your Total Estimated Investment-First 12 Months”in initial capital letters using bold type.

Table IVYour Total Estimated Investment–First 12 Months

Column 1Fee or Expense

Column 2Median Amount

Initial Franchise Fee

Other Amounts Payable to Franchisor

Amounts Payable to Third Parties

Working Capital–First 12 Months

Total Investment–First 12 Months

1. In column 1, list the following categories of expenses from thosedisclosed in Item 7 of the disclosure document: (i) initial franchisefee; (ii) other amounts payable to the franchisor; (iii) amounts pay-able to third parties; (iv) working capital–first 12 months of opera-tion; and (v) total investment–first 12 months of operation.

2. In column 2, state the amount of expense in each listed category.Where the franchisor uses a high-low range based on its current ex-perience in Item 7, state the median of that range.

3. If the franchisor uses multiple tables in Item 7 of the disclosuredocument, disclose the aggregate information from all such tables.


g) Section V. Principal Trademarks. Disclose in the following tabular formeach principal trademark to be licensed to the franchisee and requiredto be disclosed in Item 13 of the disclosure document. State the title“Principal Trademarks” in initial capital letters using bold type.

Table VPrincipal Trademarks

Column 1Mark

Column 2Date Registered

Column 3Owner

Column 4Contests/Claims

1. In column 1, disclose each principal trademark to be licensed to thefranchisee and which is registered on the Principal or SupplementalRegister of the United States Patent and Trademark Office.

2. In column 2, disclose the date of each trademark registration.

3. In column 3, disclose the name of the owner of each trademark.

4. In column 4, briefly describe any contest, claim, or infringement re-quired to be disclosed in Item 13 of the disclosure document.

h) Section VI. Term, Successor Franchise and Transfer. Disclose in the fol-lowing tabular form the following portions of the information requiredto be disclosed in Item 17 of the disclosure document. State the title“Term, Successor Franchise, and Transfer” in initial capital lettersusing bold type.

Table VITerm, Successor Franchise, and Transfer

Column 1 Column 2

Row 1 Initial Term

Row 2 Successor Franchise Term(s)

Row 3 Conditions to Obtaining aSuccessor Franchise

Row 4 Conditions to ObtainingApproval of a Transfer

1. In column 1, list the following categories of information disclosedin Item 17 of the disclosure document.


2. In column 2, row 1, state the duration of the initial term of the fran-chise agreement.

3. In column 2, row 2, state the number and the duration of any re-newal, extension, or successor terms. For the purposes of this disclo-sure, do not refer to the successor franchise term as a renewal unlessthe franchisee is permitted to continue the franchise relationship onthe same terms and conditions.

4. In column 2, row 3, briefly summarize the conditions imposed onthe franchisee in order to obtain a renewal, extension, or successorfranchise.

5. In column 2, row 4, briefly summarize the conditions imposed onthe franchisee in order to obtain the franchisor’s approval for atransfer.

i) Section VII. Provisions Affecting Profitability and Value of the FranchiseBusiness. Disclose the following risks to the extent contained in the ap-plicable provision of the franchise agreement:

1. Supply Chain. You must purchase all or nearly all of the inventory,equipment, or supplies that you need to operate your business fromus, our affiliates, or suppliers designated by us and at prices we orthe supplier set. These prices may be higher than prices youcould obtain elsewhere for the same or similar goods or services.

2. Territory. You will not receive an exclusive territory. You will besubject to competition from us and our affiliates, possibly fromother franchised or company owned outlets in close proximity toyour franchised business.

3. Minimums. You must make minimum royalty or advertising pay-ments regardless of your sales levels. You must maintain minimumsales performance levels. You must make inventory and supply pur-chases at specified minimums and/or maintain minimum inventoryon hand, even if you do not need inventory at that level. Your inabil-ity to meet these minimums may result in termination of your fran-chise and loss of your investment.

4. Pricing. You must comply with minimum and/or maximum pricesset by us for the goods and services you sell. You must also partic-ipate in any promotional pricing established by us. These require-ments may reduce your anticipated revenue and profit.

5. No Limit on Additional Investment. There are no limits on ourability to require you to make additional capital investments inyour franchise business.


6. Guarantees. You and your spouse will be required to sign a docu-ment that makes both of you liable for your financial obligationsunder the franchise agreement, even if your spouse has no owner-ship interest in the business. This guarantee will place both yourand your spouse’s marital and personal assets, including yourhouse, at risk if your franchise fails.

j) Section VII. Franchisee Median Financial Performance. Disclose in the fol-lowing tabular form a summary of the financial performance informa-tion required to be disclosed in Item 19 of the disclosure document.State the title “Franchisee Median Financial Performance” in initialcapital letters using bold type.

Table VIIFranchisee Median Financial Performance

Column 1Year

Column 2Gross

Revenue

Column 3YOY +/- %

Column 4Net Profit

Column 5% of GrossRevenue

Column 6YOY +/- %

2015

2014

2013

2012

2011

1. In column 1, state the last five fiscal years.

2. In column 2, state the median gross revenue of all franchises of thefranchisor during each fiscal year. For the purposes of this disclo-sure, “gross revenue” is defined as the total amount of revenue de-rived from the sale of goods or services less sales tax, discounts,allowances, and returns.

3. In column 3, state the increase or decrease, expressed as a percent-age, in the median gross revenue of all franchises of the franchisorfrom the previous fiscal year.

4. In column 4, state the median net profit of all franchises of the fran-chisor during each fiscal year. For the purposes of this disclosure,“net profit” is defined as gross revenue less all ordinary and recur-ring operating expenses, including depreciation, but excluding in-come taxes, interest, and amortization.

5. In column 5, state the median net profit of all franchises of the fran-chisor as a percentage of the median gross revenue of all franchisesof the franchisor during such fiscal year.


6. In column 6, state the increase or decrease, expressed as a percent-age, in the median net profit of all franchises of the franchisor fromthe previous fiscal year.

k) Section IX. Franchised Outlets. Disclose in the following tabular form asummary of the information required to be disclosed in Item 20 of thedisclosure document. State the title “Franchised Outlets” in initial cap-ital letters using bold type.

Table IXFranchised Outlets

Column 1Year

Column 2Outlets

Column 3YOY +/-

Column 4YOY +/-

%

Column 5Turnover

%

Column 6Transfers

Column 7Sold NotOpen

2015

2014

2013

2012

2011


2. In column 2, state the total number of franchised outlets in all statesat the end of each fiscal year.

3. In column 3, state for each fiscal year the increase or decrease in thetotal number of franchised outlets in all states from the end previousfiscal year.

4. In column 4 state for each fiscal year the increase or decrease, ex-pressed as a percentage, in the total number of franchised outletsin all states from the previous fiscal year.

5. In column 5, state, expressed as a percentage, the turnover rate offranchised outlets during each fiscal year. For the purposes of thisdisclosure, the “turnover rate” is computed as the total number offranchised outlets terminated, non-renewed, or ceased operationsfor other reasons, during the fiscal year, divided by the number offranchised outlets at the start of each such fiscal year.

6. In column 6, state the number of franchised outlets transferred fromfranchisees to new owners other than the franchisor or its affiliatesin all states during each fiscal year.


7. In column 7, state the total number of franchise agreements thathave been signed for new outlets to be located in all states at theend of the fiscal year, where the outlet had not yet opened.

l) Section X. Company Outlets. Disclose in the following tabular form asummary of the information required to be disclosed in Item 20 ofthe disclosure document. State the title “Company Outlets” in initialcapital letters using bold type.

Table XCompany Outlets

Column1Year

Column 2Outlets

Column 3YOY +/-

Column 4YOY %

Column 5Turnover %

Column 6From (To)

Zees

2015

2014

2013

2012

2011


2. In column 2, state the total number of company-owned outlets in allstates at the end of each fiscal year. For the purposes of this disclo-sure, a “company-owned outlet” is defined as an outlet owned ormanaged by the franchisor or its affiliate, operating a substantiallysimilar business under the same brand as the business the franchisoroffers to franchisees.

3. In column 3, state for each fiscal year the increase or decrease in thetotal number of company-owned outlets in all states from the end ofthe previous fiscal year.

4. In column 4, state for each fiscal year the increase or decrease, ex-pressed as a percentage, in the total number of company-ownedoutlets in all states from the previous fiscal year.

5. In column 5, state, expressed as a percentage, the turnover rate ofcompany-owned outlets during each fiscal year. For the purposesof this disclosure, the “turnover rate” is defined as the total numberof outlets closed plus the number of outlets sold to franchisees dur-ing the fiscal year, divided by the number of company-owned out-lets at the start of each such fiscal year.


6. In column 6, state the number of company-owned outlets sold tofranchisees minus the number of outlets reacquired from franchiseesduring each fiscal year.

m) Section XI. Franchisor Profit and Loss Statements-Selected Items. Disclosein the following tabular form a summary of the information requiredto be disclosed in Item 21 of the disclosure document. State the title“Franchisor Profit and Loss Statements–Selected Items” in initial cap-ital letters using bold type.

Table XIFranchisor Profit and Loss Statements–Selected Items ($000)

Column 1Year

Column 22015

Column 32014

Column 42013

Royalties

Initial Franchise Fees

Franchisee Purchases

Total Revenue

Expenses-FranchiseePurchases

Total Expenses

Net Income

YOY % Increase (Decrease)

1. In columns 2, 3, and 4 state the following from the information con-tained in the financial statements of the franchisor for the last threefiscal years: (a) revenue from royalties; (b) revenue from initial fran-chise fees; (c) revenue derived from required purchases or leases byfranchisees; (d) total revenue from all sources; (e) expenses incurredby the franchisor on account of required purchases or leases by fran-chisees; (f ) total expenses, including, without limitation, interest,taxes, and depreciation; (g) net income after all expenses; and(h) the increase or decrease, expressed as a percentage, in the net in-come of the franchisor from the previous fiscal year.

n) Section XII. Franchisor Balance Sheet-Selected Items. Disclose in the fol-lowing tabular form a summary of the information required to be dis-closed in Item 21 of the disclosure document. State the title “Franchi-sor Balance Sheet-Selected Items” in initial capital letters using boldtype.


Table XIFranchisor Balance Sheet-Selected Items ($000)

Column 1Year

Column 22015

Column 32014

Column 42013

Current Assets

Current Liabilities

Working Capital

Intangible Assets

Total Assets

Long-Term Debt

Total Liabilities

Shareholder Equity

YOY Increase (Decrease)

1. In columns 2, 3, and 4 state the following information contained in thefinancial statements of the franchisor for the last three fiscal years:(a) all current assets, but not including intangible assets; (b) all currentliabilities; (c) working capital, defined as current assets minus currentliabilities; (d) intangible assets, including without limitation, goodwill,trademark rights, and franchise rights; (e) total assets; (f ) long-termdebt; (g) total liabilities; (h) owners’ equity, defined as total assetsminus total liabilities; and (i) the increase or decrease in owners’ equityof the franchisor from the previous fiscal year.

o) Section XII. Dispute Resolution. Disclose in the following tabular formthe following portions of the information required to be disclosed inItem 17 of the disclosure document. State the title “Dispute Resolu-tion” in initial capital letters using bold type.

Table XIIDispute Resolution

Provision Summary

Governing Law

Venue

Arbitration/Litigation

Damages

Legal Fees and Costs

Class Action/Consolidation

Shortened Limitation of Claims

Royalties after Termination

Noncompetition Provisions


1. Briefly summarize:

a. The choice of law provisions of the franchise agreement.

b. The choice of forum provisions of the franchise agreement.

c. The types of disputes that are subject to arbitration and/orlitigation.

d. The provisions in the franchise agreement that serve to limit thedamages that may be recovered by the franchisee or thefranchisor.

e. Any legal fee shifting provisions in the franchise agreement.

f. Any provisions that would serve to limit or prohibit the franchiseefrom participating in a consolidated or class action proceeding.

g. Any provisions in the franchise agreement that limit the period oftime during which claims must be asserted by the franchisee orthe franchisor.

h. The extent to which the franchisee is liable for royalties or otherfees and charges after termination of the franchise agreement.

i. Any covenants against competition which apply to the franchiseefollowing termination or expiration of the franchise agreement.

p) Section XIII. Franchisee Associations.

1. Disclose the name, address, telephone number, email address, andweb address of each trademark specific franchisee organization asso-ciated with the franchise system being offered and which is requiredto be disclosed in Item 20 of the disclosure document.

2. Disclose whether such trademark specific franchisee organizationhas been created, sponsored, or endorsed by the franchisor and, ifso, state the relationship between the organization and thefranchisor.


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