FDD Item 16: Restrictions on What the Franchisee May Sell Explained
Item 16 of the franchise disclosure document discloses the restrictions a franchisor places on the goods and services a franchisee may sell and any limits on the customers a franchisee may serve. It tells candidates how much control the franchisor keeps over what the business offers. Item 16 is governed by 16 CFR 436.5(p).
What Is Item 16 of the FDD?
Item 16 is the restrictions section of the franchise disclosure document. It tells prospective franchisees what they will be allowed to sell, what they will be required to sell, and whether the franchisor can change that list over time.
The disclosure requirements are codified under 16 CFR 436.5(p) and enforced by the Federal Trade Commission.
Item 16 is one of the shorter items in the disclosure document, but candidates read it closely because it defines the scope of the business they are buying. Franchise systems rely on a consistent customer experience across locations, so most agreements limit what a franchisee may offer. Item 16 puts those limits in front of the candidate before they sign.
What Must Be Disclosed in Item 16?
Item 16 discloses the franchisor’s restrictions on the goods and services a franchisee sells and whether the franchisor can change them.
The Obligation to Sell Only Approved Goods and Services
The franchisor discloses any obligation on the franchisee to sell only the goods and services it approves. This sets a ceiling on the offering. It stops a franchisee from adding products or services the franchisor has not cleared, and it is the most common Item 16 restriction.
The Requirement to Offer All Authorized Goods and Services
Item 16 also discloses any obligation to carry everything the franchisor authorizes. This sets a floor. A franchisee cannot stock only the items it prefers, so a customer finds the brand’s full core lineup at any location.
The Franchisor’s Right to Change What Is Authorized
The franchisor discloses whether it can change the authorized goods and services and, if so, any limit on that right. This tells a candidate how much the offering can shift after signing. An unlimited right to revise the list gives the franchisor more control than a right that is capped.
Restrictions on Customers a Franchisee May Serve
Beyond limits on goods and services, Item 16 discloses limits on who a franchisee may sell to.
Some franchise systems restrict the customers a franchisee may serve, often to protect accounts the franchisor handles directly or to keep franchisees from competing for the same national customers. Where these limits exist, Item 16 discloses them so a candidate understands that certain customers may be off limits.
These customer restrictions frequently connect to the territory a franchisee receives. A candidate reading Item 16 alongside the territory disclosures can see both what the business may sell and to whom.
Common Mistakes Franchisors Make With Item 16
Understating the Restrictions
A franchisor may describe its restrictions loosely to make the offering look more flexible than the agreement allows.
Item 16 has to match the franchise agreement. If the agreement limits the franchisee to approved goods and services, Item 16 says so plainly rather than softening it, because a candidate and their attorney will compare the two.
Omitting Customer Limitations
Franchisors sometimes disclose restrictions on goods and services but overlook limits on the customers a franchisee may serve.
Both belong in Item 16. A restriction that reserves certain accounts or national customers to the franchisor is disclosable even when the franchisee faces no limits on the products themselves.
Leaving Out the Right to Change
Item 16 asks whether the franchisor can change the authorized goods and services and whether any limit applies to that right.
Stating the current restrictions without addressing the right to change them leaves the disclosure incomplete. A candidate needs to know whether the scope of the business can shift after they sign.
How Item 16 Connects to Other FDD Items
Item 16 reads alongside several items that together define the shape of the franchised business. The territory a franchisee operates in is disclosed in Item 12, and customer restrictions in Item 16 often track the territorial rights described there.
The franchisee’s obligation to follow the franchisor’s restrictions on products and services appears in the Item 9 obligations table, which points back to Item 16. Required purchases of approved goods and supplies are disclosed in Item 8. The trademarks and proprietary systems the franchisee operates under are covered in Items 13 and 14, and the franchise agreement that imposes the restrictions is attached as an exhibit under Item 22.
Franchise Genesis
How Franchise Genesis Helps Franchisors Prepare Item 16
Item 16 is short, but it defines the scope of the franchised business, so it has to match the franchise agreement exactly. Getting it right means disclosing the obligation to sell only approved goods and services, the obligation to sell all authorized goods and services, any customer limitations, and the franchisor's right to change what is authorized.
Franchise Genesis works with franchisors to prepare a franchise disclosure document that is accurate, compliant, and built to support franchise sales.
Experienced franchise attorneys are included in the development program. They help franchisors state the restrictions clearly, align Item 16 with the franchise agreement, and present the limits in a way that maintains system consistency without overstating the control a franchisee faces.
Frequently Asked Questions
Item 16 discloses the franchisor’s restrictions on the goods and services a franchisee may sell and any limits on the customers a franchisee may serve. It is governed by 16 CFR 436.5(p).
Restrictions keep the customer experience consistent across locations. When every franchisee offers the same approved goods and services, customers get a predictable experience under the brand, which is central to how franchise systems operate.
Often, yes. Item 16 discloses whether the franchisor has the right to change the types of authorized goods and services and whether any limit applies to that right, so a candidate knows whether the scope of the business can shift after signing.
Yes. Item 16 discloses any limits on the customers a franchisee may serve, such as accounts the franchisor reserves to itself, in addition to restrictions on goods and services.
Yes. The restrictions in Item 16 have to reflect the limits in the franchise agreement. A candidate and their attorney will compare the two, so the disclosure should state the restrictions accurately rather than understating them.