2.1 The Franchisor Parents, Predecessors, and Affiliates | Item 1

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