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Item 2 of the FDD
What is Item 2 of the Franchise Disclosure Document?
Item 2 of the FDD provides background information about the franchisor’s ownership group, executive/management team and any individuals who have management responsibility over the sale and operation of the franchised businesses. Item 2 is not a biography for each person though. It is a very specific disclosure that tracks the employment history of each person featured in Item 2 and has a 5-year lookback period. In order to complete Item 2 properly, each person featured in Item 2 will need to have their title with the franchisor, and a 5-year employment history that discloses the companies they worked for, location of those companies, title with the organization, and a chronological timeline with a month/year start and end date for each role.
How is Item 2 used to help sell franchises?
Item 2 of the FDD is an opportunity to show off the strength of the franchisor’s ownership group and executive team. For emerging brands, Item 2 is often just the founders of the brand and possibly an operations manager, training manager or similar role. With more established brands, or those with a broader ownership group – Item 2 will be a bit more robust. While the franchise rules only require disclosure of the owners, executives, and people who will have management responsibility over the sale or operation of franchises – franchisors are permitted to “beef up” the Item 2 if they choose by including other personnel who will support franchisees. Because Item 2 is not a biography, we use the “prior business experience” of Item 1 to help tell a more narrative story about the history of the brand and its founders/team.
Working with your franchise attorney to determine who is required, and who might be a good addition to the Item 2 is your best bet here. If someone is a “close call” - or definitely an optional Item 2 person - it’s important to weight the benefits of including that person against the effects that including them may have on other disclosures in the FDD. For example, people who are listed in Item 2 may also need to include certain disclosures regarding litigation in Item 3 and bankruptcy in Item 4. Our attorneys are experts at helping navigate the pros and cons of including these “close calls” and keeping your Item 2 a nice balance of sales tool and compliance obligation.
RESOURCES
Item 2: Business Experience. Disclose by name and position the franchisor's directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered by this document. For each person listed in this section, state his or her principal positions and employers during the past five years, including each position's starting date, ending date, and location.
Item 2 of the amended Franchise Rule is substantially similar to Item 2 of the UFOC Guidelines. It requires disclosure of the business experience of certain individuals – including directors and principal officers, among others – for the last five years. A longer period is acceptable if the prior experience is directly relevant to the franchises being offered for sale.
There are, however, important differences between the amended Rule Item 2 and Item 2 of the UFOC Guidelines. First, franchisors need not disclose information about the business experience of any broker that may be involved in sales of its franchises. Second, in addition to disclosing the business background of directors and principal officers, franchisors must disclose the business experience of any individuals – even if they do not have a formal title – who have management responsibility relating to the sale or operation of franchises offered by the disclosure document. 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, that individual’s business experience should be noted in the Item 2 disclosure. This does not mean that franchisors must disclose all managers. Rather, sales and operations managers, regardless of whether they have a formal title, 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.
