Notwithstanding FAQ 4, if a franchisor’s parent is the sole supplier of a good or service without which a franchise cannot be operated, must the financials of the parent be disclosed in Item 21?
Yes. FAQ 4 addresses only those circumstances in which “a franchisor’s “parent happens to supply goods or services to franchisees,” and “is no different from any other third-party supplier.” It does not consider the case where the franchisor’s parent is the only supplier of a good or service that is so essential to the franchise that the franchised business cannot be conducted without it. As stated in the Statement of Basis and Purpose, “[t]o the extent that a prospective franchisee is asked to rely on a parent to perform post-sale contractual obligations or relies on a parent’s guarantee, the financial stability of the parent becomes a material fact that should be disclosed.” 1 It is staff’s view that, even in the absence of an express commitment in the franchise agreement for the franchisor’s parent to provide a good or service that is so essential to the franchise that the franchised business cannot be conducted without it, this obligation is implicit in the contractual obligations
