Item 22, contracts

Twenty-one Items describe a relationship. Item 22 hands over the documents that create it. The Item lists every contract proposed for use or in use in the offering — the franchise agreement first, and then whatever else the transaction requires — and attaches them as exhibits. It is the shortest Item to read and the longest to act on, and it is where a well-run reading and a badly run one become visible.

What tends to be on the list

The franchise agreement is the anchor. Around it, restaurant filings commonly attach some combination of a development or multi-unit agreement where the offering includes one; a personal guarantee; a lease addendum or collateral assignment of lease that gives the franchisor rights in your premises; a confidentiality and non-competition agreement for owners and managers; software or technology licences; forms authorising electronic debit of fees; a general release used at renewal or transfer; state-specific addenda required by registration states; and the franchisee questionnaire or acknowledgement statement that some systems ask a buyer to sign before closing.

The list varies, and its shape tells you about the offering before you read a word of any exhibit. A filing whose exhibit list includes a development agreement is selling a schedule, not a shop. GDK’s FDD issued 3 September 2024 offers outlets inside a five-outlet minimum commitment with an Item 7 range of $690,500–$1,123,000 per outlet; the document that carries those five openings and their deadlines is an exhibit, not an Item. A filing with a lease addendum in the list has told you that your landlord relationship is partly the franchisor’s business too.

The order to read them in

Start with the exhibits that create obligations nobody summarised for you. The franchise agreement will be read by counsel in full; a consultant’s job before that is to make sure the buyer knows what else is in the pile.

The collateral assignment of lease is the first of those. It typically lets the franchisor step into your premises lease on termination, which means the site — often the most valuable thing the franchisee has built — may not be theirs to keep or to sell independently of the franchise.

The personal guarantee is the second. Read who signs it, what it covers, and when it ends. A guarantee that survives a transfer means the exit summarised in Item 17 is not a clean break.

The general release is the third. Where a system requires a release at renewal or transfer, the practical effect is that exercising a right disclosed in Item 17 costs you any claims you had accumulated up to that point. That is lawful in many circumstances and restricted in some states, which is exactly why the state addenda are attached.

The state addenda are the fourth, and they are frequently the most consequential pages in the whole document for a particular buyer, because they modify the agreement’s terms for franchises registered or sold in specific states. Read the addendum for your state before reading the clause it modifies.

Reconciling the summary against the exhibit

Item 22 is what makes the rest of the document testable. Take the rows you copied out of Items 5, 6, 12 and 17 and trace each one into the agreement section that Item 9’s cross-reference column points at. You are checking three things: that the summary matches the clause, that the defined terms mean what you assumed, and that no material obligation exists in the exhibit which no Item happened to summarise.

Defined terms are where most of the surprises live. “Gross sales” decides what the royalties in Item 6 are charged on. “Then-current” decides what a renewal fee will be — GDK’s renewal fee is 50% of the then-current franchise fee, and Shah’s transfer fee is 50% of the then-current fee, so both depend on a document that does not yet exist. “Protected territory” decides whether the boundary in Item 12 means anything once the reserved rights are read. None of those terms is defined in the Items; all of them are defined in the exhibit.

Version control is part of this Item

Exhibits are dated documents attached to a dated disclosure. If an amended FDD arrives, the exhibits may have changed too, and a buyer who reviewed the earlier pile has reviewed a different deal. Keep the whole package together as one version, with the receipt from Item 23 and the delivery email, and treat a later amendment as a new version rather than as a correction to the old one. The fourteen-day rule attaches to a specific document, and counsel should be the one to say what an amendment does to the clock.

The same discipline applies to the copy you practise on. A filing downloaded from a state registry is excellent for learning how a document is put together, and it is not the document a buyer signs. Ask the franchisor for the current FDD with its exhibits, and check that the agreement in front of you is the one attached to it.

What an absence tells you

If an obligation you were told about in a meeting does not appear anywhere in the exhibits, it does not exist. That cuts in both directions and is the most useful thing a consultant can explain to an enthusiastic buyer: a promise of extra support, a discounted fee, an exclusive area, a marketing commitment or a menu accommodation lives in a signed document or it lives nowhere. Ask for it to be added by amendment, and if it cannot be, record what the answer was.

Conversely, a document on the list that nobody has mentioned is worth opening first. Exhibit lists rarely contain surprises for the franchisor and frequently contain them for the buyer.

Related reading

• FDD vs franchise agreement — why the exhibit governs the summary
• Item 9, franchisee’s obligations — the index into these clauses
• Item 23, receipts — proving which version you received
• Item 17, renewal and exit — releases, transfers and guarantees
• Attorney and accountant — who reads the pile, and when