US Franchise Product and Service Rules: Planning FDD Item 16

When you franchise an existing US business, deciding what franchisees may sell is more than a branding exercise. Your successful outlet may rely on informal decisions about new products, special requests and seasonal services. A franchise community needs clearer boundaries. Before offering franchises, turn those decisions into a workable sales policy that your legal adviser can reflect in your Franchise Disclosure Document (FDD) and franchise agreement.

1. Define the offer you are actually franchising

Start with your existing product or service list, but do not assume everything belongs in the franchise model. Some offerings may depend on the founder’s expertise, specialist equipment or customer relationships that another operator cannot readily reproduce.

Divide your offer into three practical categories:

• Required: the products or services every outlet must provide to deliver the core customer experience.
• Optional with approval: additions that suit particular premises, customer groups or local demand, subject to agreed conditions.
• Prohibited: activities that conflict with the concept, introduce unacceptable risks or exceed the support you can provide.

For a cleaning business, for example, routine domestic cleaning might be required, while specialist restoration work might be excluded. A café might require its core drinks range but permit a limited seasonal menu after approval.

These are business design choices, not universal legal requirements. Test whether each restriction has a clear purpose. A rule that cannot be explained or consistently administered may create avoidable friction as the community grows.

2. Understand what FDD Item 16 covers

The Federal Trade Commission’s Franchise Rule, at 16 CFR Part 436, regulates franchise disclosure in the United States. Unless an exemption applies, franchisors must provide an FDD containing 23 disclosure items. The federal rule generally requires delivery at least 14 calendar days before a prospective franchisee signs a binding agreement with, or pays money to, the franchisor or an affiliate in connection with the proposed franchise sale.

Item 16 addresses restrictions on what the franchisee may sell. It requires disclosure of whether franchisees may sell only goods or services approved by the franchisor, must sell all goods or services authorised by the franchisor, or face restrictions on the customers to whom they may sell. It also addresses the franchisor’s right to change the types of authorised goods or services and any limits on that right.

This is distinct from Item 8, which concerns restrictions on sources of products and services. Requiring an approved service menu and requiring purchases from a designated supplier are different controls, even when they operate together.

State franchise registration and disclosure laws may impose additional requirements. There is no single federal franchise registration that authorises nationwide sales. Have US franchise counsel review the policy alongside the laws applicable to your offer and proposed locations.

3. Build a controlled route for local variations

Absolute uniformity is not always practical. Equally, allowing each franchisee to invent a separate offer can weaken the concept and leave you supporting services you have never tested.

Create a written variation process before the first request arrives. Ask the franchisee to explain:

• What they want to sell and why customers need it.
• Which equipment, skills and operating procedures it requires.
• Whether it raises additional licensing, insurance or safety questions.
• How they propose to price, promote and test it.
• What happens if the trial is unsuccessful.

Assign an internal decision-maker and a realistic response target. Specify that submitting a request is not permission to proceed. Record approvals, conditions, trial periods and withdrawal arrangements in writing.

For example, approving a seasonal service at one outlet should not accidentally make it available throughout the network. Distinguish a temporary local trial from an addition to the approved system-wide offer.

4. Align change rights with operational reality

Your business will evolve, so consider how future additions and withdrawals will work. A contractual right to introduce new services does not, by itself, make those services operationally achievable.

Before making a new offering compulsory, assess equipment costs, training needs, staffing capacity, premises limitations and implementation time. Test the change in company-operated outlets where practicable. Identify any existing locations that cannot deliver it safely or consistently.

Ask your solicitor to align the franchise agreement, Item 16 disclosure and relevant manual provisions. Do not assume an operations manual can expand contractual rights. Sales presentations should also match the documents: promises of unrestricted local choice are difficult to reconcile with a tightly controlled offer.

Maintain a dated list of required, optional and prohibited offerings, with a record of approved exceptions. This gives support staff and franchisees a common reference point.

Practical takeaway: Before franchising, define what every outlet must sell, what needs approval and what is excluded. Then have counsel translate that tested policy into consistent disclosure and contractual terms.