What Item 22 Contains
Item 22 includes the actual contracts you will be required to sign. These documents govern every aspect of your franchise relationship and should be reviewed carefully with legal counsel.
Common Contracts in Item 22
- Franchise Agreement: The primary contract defining fees, territory, term, obligations, and termination conditions.
- Personal Guarantee: Makes you personally liable for franchise obligations beyond your business entity.
- Confidentiality Agreement: Restricts disclosure of proprietary systems, methods, and business information.
- Lease or Sublease Agreement: If the franchisor controls real estate, outlines your lease terms and obligations.
- Non-Compete Agreement: Restricts your ability to operate competing businesses during and after the franchise term.
Why Item 22 Matters for Franchise Buyers
The contracts in Item 22 are legally binding documents that will govern your business for 10-20 years. Understanding every provision is essential before signing.
Long-Term Commitment
Franchise agreements typically run 10-20 years. You'll live with these terms for a long time.
Personal Liability
Personal guarantees can put your home, savings, and other assets at risk if the business fails.
Exit Restrictions
Transfer, sale, and termination provisions determine how easily you can exit the business.
Post-Term Restrictions
Non-compete clauses may prevent you from working in your industry for years after leaving.
Key Insight
Never assume contracts are "standard" or non-negotiable. While most franchisors resist changes, some terms can be modified, especially for experienced operators or multi-unit deals. Always ask.
What to Look For in Item 22
Termination Provisions
What can trigger termination? How much notice is required? What are your rights if terminated?
Transfer and Sale Rights
What approvals are needed to sell? Does the franchisor have right of first refusal? What fees apply?
Renewal Terms
What conditions must you meet to renew? Will you sign the then-current agreement with different terms?
Dispute Resolution
Where must disputes be resolved? Is arbitration required? What law governs the agreement?
Red Flags in Item 22
Unlimited Franchisor Discretion
Contract language giving the franchisor "sole discretion" on important matters removes your protections.
Broad Non-Compete Clauses
Non-competes that extend years after termination or cover broad geographic areas can severely limit your options.
Spousal Guarantees Required
Requiring your spouse to sign the personal guarantee puts your entire household at risk, even if they are not involved.
Unfavorable Dispute Venue
Requiring disputes be resolved in a distant state increases your costs and gives the franchisor a home court advantage.
Questions to Ask the Franchisor
- 1.Which contract terms, if any, are negotiable?
- 2.Has the franchise agreement changed recently? If so, how?
- 3.What happens to my territory if I do not meet performance requirements?
- 4.Can the personal guarantee be limited in scope or removed after proving performance?
- 5.What are the most common reasons for franchisee terminations in your system?
Frequently Asked Questions
What is FDD Item 22?
Item 22 lists all the agreements you will be required to sign as part of the franchise purchase. This includes the franchise agreement, lease agreements, personal guarantees, confidentiality agreements, and any other contracts.
Are franchise contracts negotiable?
Most franchisors offer standard contracts with little room for negotiation, as they want uniformity across the system. However, some terms may be negotiable, particularly for experienced multi-unit operators. Always ask.
Should I have an attorney review the contracts?
Absolutely. A franchise attorney can identify unfavorable terms, explain your obligations, and potentially negotiate improvements. This is one of the most important investments in your due diligence process.
What is a personal guarantee?
A personal guarantee makes you personally liable for franchise obligations even if you operate as an LLC or corporation. If your business fails, creditors can pursue your personal assets.
Can I get copies of contracts before signing the FDD receipt?
Yes. Item 22 must include copies of all agreements. You should receive these with the FDD and have at least 14 days to review them before signing anything. Never rush this process.