Item 16 of the Franchise Disclosure Document (FDD) discloses any restrictions on what products or services the franchisee may sell and the customers to whom they may sell. It defines the limits of the franchisee’s authorized business activities within the franchise system.
In franchising, Item 16—titled “Restrictions on What the Franchisee May Sell”—describes the products, services, and methods of operation that the franchisor authorizes for sale within the franchise. The franchisor uses these restrictions to maintain consistency, protect brand identity, and ensure quality control across all franchise locations. This section also discloses whether franchisees may sell unapproved products, operate outside approved channels, or serve certain types of customers. The goal of Item 16 is to make sure prospective franchisees understand the boundaries of what they can and cannot offer, preventing unauthorized activities that could harm the brand or violate the Franchise Agreement.
Item 16 has been part of the franchise disclosure format since the Uniform Franchise Offering Circular (UFOC) and remains an important section under the Federal Trade Commission’s (FTC) Franchise Rule. Historically, some franchisees introduced new products or altered services that were inconsistent with brand standards, leading to customer confusion and legal disputes. To protect the integrity of franchise systems, the FTC required franchisors to clearly disclose all operational restrictions and approved offerings in Item 16. Today, these disclosures are critical for maintaining brand uniformity, ensuring supply chain control, and preventing unfair competition between franchisees.
Under the FTC Franchise Rule (16 C.F.R. Part 436), Item 16 requires franchisors to disclose all restrictions placed on franchisees regarding the goods and services they may offer. Specifically, franchisors must identify:
From a legal standpoint, Item 16 protects both franchisor and franchisee by defining clear operational parameters. Operationally, it ensures that all franchise locations deliver the same brand experience, reinforcing customer trust and consistency systemwide.
| Restriction Type | Description | Purpose |
|---|---|---|
| Product or Service Limitations | Franchisees may sell only products or services approved by the franchisor. | Maintains brand quality and consistency. |
| Supplier Restrictions | Franchisees must purchase approved items from designated vendors or suppliers. | Ensures product uniformity and protects intellectual property. |
| Customer Limitations | Sales may be restricted to specific customer types or locations. | Prevents market overlap and ensures territorial compliance. |
| Menu or Offering Control | Franchisor controls what appears on menus, catalogs, or online platforms. | Preserves consistent branding and pricing structure. |
| New Product Approval | Franchisees must obtain written approval before offering new items. | Allows franchisor to test and evaluate changes before systemwide rollout. |
| Issue | Best Practice |
|---|---|
| Unclear Definitions of “Approved Products” | List specific products, categories, or examples to prevent misunderstandings. |
| Inconsistent Application of Restrictions | Apply uniform standards across all franchisees to avoid claims of unfair treatment. |
| Unrealistic Product Controls | Ensure restrictions are commercially reasonable and supported by legitimate brand interests. |
| New Product Introduction Delays | Provide clear timelines for franchisor approval to support innovation and responsiveness. |
| Failure to Update | Update the FDD annually to reflect any new or discontinued products or services. |
'Item 16 of the FDD states that franchisees must sell only franchisor-approved products and services consistent with the brand’s standards.'
'According to Item 16, franchisees are prohibited from selling competitive products or offering unapproved menu items.'
'Franchisees should review Item 16 carefully to understand what products and services are authorized and any limits on their business operations.'
Item 16 of the Franchise Disclosure Document (FDD) specifies what products and services franchisees are permitted to sell and any related restrictions. By defining authorized offerings, supplier requirements, and customer limitations, this section ensures operational consistency, protects brand integrity, and clarifies the scope of the franchisee’s rights within the franchise system.
