Franchise Disclosure Documents – Item 4: Bankruptcy

Item 4: Bankruptcy

The bankruptcy disclosures of the amended Rule are substantively similar to those of the UFOC Guidelines. One difference, however, is the list of persons about whom bankruptcy information must be disclosed. Franchisors must disclose not only the bankruptcy history of the franchisor itself, its affiliates, and predecessors, but also of any of its parents. Moreover, for Item 4 purposes, the disclosure of affiliate and parent information is not limited – as it is for Item 2 and Item 3 – to affiliates or parents that guarantee performance or back the franchisor financially. Bankruptcy history must be disclosed for all affiliates and parents: any bankruptcy in which an affiliate or a parent was involved during the 10-year reporting period immediately before the issuance date of the disclosure document must be disclosed.

In addition, franchisors must disclose bankruptcies involving any officer or general partner of the franchisor, and “any other individual who will have management responsibility relating to the sale or operation of franchises offered” by the disclosure document, including those of any company of which they were a principal officer or general partner. As in Items 2 and 3, the question of who, other than officers or a general partner, is subject to the disclosure focuses on actual management responsibility, instead of title.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.