Franchise Questions

Item 2 of the FDD is the “who” of the franchisor.  Item 2 provides business background information for your officers and management team.

You are required to include the following individuals in your Item 2:

• Franchisor’s directors/trustees/general partners
• Franchisor’s principal officers (e.g. President, CEO, COO, etc.)
• Individuals with management-level responsibility for franchise operations
• Individuals with management-level responsibility for franchise sales

It does not matter whether the individuals with management responsibility are employed by the franchisor, an affiliate, or by a parent company. As long as the individual actively manages the sale of franchises or the operation of franchises (even if they do not have a formal title) that individual’s business experience should be disclosed in Item 2. This does not mean that franchisors must disclose all managers. Only those sales and operations managers should be disclosed if their involvement in either sales or operations is such that a prospective franchisee would rely on their expertise, formulation of policy, or control of the system in making an investment decision.

Franchisors do not need to disclose information about the business experience of any broker that may be involved in the sales of its franchises (unless they somehow have management responsibility, which is rare).

What is included in Item 2?

Item 2 is not a resume or CV. There are rigid and specific guidelines on what can (and must) be included in the Item 2, as follows:

• Individual’s name
• Job title and company
• Time period employed (beginning and ending month and year)
• Location of individual (city and state)
• Last five years only, unless the employment was directly tied to the franchisor, parent or affiliate

There must be no gaps in the five-year look back for employment, so you may need to include explanations for unemployment, child rearing or time as a student.

Here’s a template of the above required information:

[Name] has been our [Title] in [City, State] since [Month and Year]. Prior to this, [Name] was the [Title] for [Company] in [City, State] from [Month and Year] to [Month and Year].

Be careful to only include those individuals required to be included, or else you may be amending your FDD any time one of these individuals leaves the franchisor. Also keep in mind that certain litigation and bankruptcies need to be disclosed for everyone listed in Item 2.

When do I need to amend the Item 2?

Material changes must be reflected in the FDD either quarterly (federal) or immediately (registration states). The FTC has said that a material change is one that is “likely to affect consumers’ conduct or decisions with respect to the product at issue.” While not every management change is material, adding or removing a senior manager (like a President) is likely material. Also, if there are a very small number of individuals listed in Item 2, then adding or removing one may be material.