Item 15 of the Franchise Disclosure Document, or an FDD, explains the franchisor’s requirements for personal involvement of the franchisee. Maybe you’re looking for a turnkey business where you do very little or a franchise that will be your day-to-day job. Item 15 tells you what your expectations should be with a particular franchise opportunity.
Item 15 in the FDD states specifically if the person who is signing the franchise agreement needs to be personally involved in the daily business operations or if the franchisee can hire someone else to operate the store daily. Turnkey franchisees need to pay close attention to Item 15.
Franchise Principal Operator
When you’re thinking about opening a franchise, one of the things you need to consider is how much you want to be involved in the daily activities of the franchise.Those looking for a full-time day job where they are their own boss probably want to be deeply involved in the franchise operations. Others, who want a turnkey investment while they’re off doing other things, will want to hire what’s called a principal operator.
The responsibilities of a principal operator vary greatly depending on the agreement between the franchisee and the person they employ. For one principal operator, it might mean doing everything an owner would to run the business, from doing the accounting to hiring and managing employees. Another franchisee, on the other hand, might do certain activities for running the franchise but the majority of the role of running the franchise falls to the principal operator.
Roles of Franchisees and Franchise Principal Operators
Item 15 of the FDD should explain how the franchisor sees your role and the role of your employees, which may include a principal operator. It might be two short paragraphs or a long and involved section that explains what is required of you and your staff. Either way, you need to thoroughly read and understand Item 15 and be prepared to apply it once your sign a franchise agreement.
As a franchisee, you are typically required to attend training even if you’re not going to be the “on premises” manager. Often franchises require the principal operator to attend these trainings with you, which can dramatically increase costs for startup, depending on how the franchisor charges for training. If you’ve decided to go with a principal operator, you and the principal operator also need to abide by rules such as confidentiality and non-compete agreements.
Some franchises also require the principal operator to have a vested interest in ownership in the franchise while others do not. If this information isn’t in the FDD, make sure to ask questions about a franchisor’s policies on principal operators and what they require, if anything, for an investment from the operator. If you want to own your franchise solely on your own and not involve other individuals, you’ll need to find a franchisor that allows this investment practice. Speaking with a franchise attorney can help you think about all the different repercussions that occur when there is another individual investor like a vested principal operator.
No matter how you want to run your franchise, there is a franchisor that matches your desires and goals — give yourself time to find the right one.
