What Is Item 16 in an FDD? Restrictions on What the Franchisee May Sell

Item 16 — Restrictions on What the Franchisee May Sell controls the product and service catalog of every unit in the system. It also reserves the franchisor's right to change that catalog over the term of the agreement. For a buyer evaluating a franchise, Item 16 is where you find out how much room you have to adapt the offering to your local market — and how much room the franchisor reserves to require new products or services from you in the future.

What Item 16 requires

The FTC Franchise Rule at 16 CFR §436.5(p) requires the franchisor to disclose any restrictions or conditions on the goods or services the franchisee may sell. Specifically:

• Whether the franchisee is required to sell only goods or services approved by the franchisor.
• Whether the franchisee is required to sell all goods or services authorized by the franchisor, including any minimum-product or minimum-service requirements.
• Whether the franchisor has the right to change the types of authorized goods or services, and the franchisee's obligation to add or drop products and services as a result.
• Any restrictions on the customers to whom the franchisee may sell (for example, prohibitions on selling to certain national accounts, government accounts, or accounts the franchisor reserves for itself).
• Any restrictions on sales channels — internet sales, mobile catering, off-premises catering, wholesale, or other channels outside the approved physical location.

The disclosure is typically a short list of the categories of restriction that apply, with cross-references to specific sections of the franchise agreement and the franchisor's operations manual.

What it actually tells you

Item 16 is about three different forms of control: what you sell, to whom, and how.

Product approval and required offerings

Most franchise agreements require the franchisee to offer all goods and services the franchisor designates as required, and to offer only goods and services the franchisor has approved. The rule has two practical effects:

1. You cannot drop a slow-moving menu item or product line simply because it does not perform in your market — unless the franchisor agrees to a local exception.
2. You cannot add a complementary product or service — even one that fits naturally with the brand — without going through the franchisor's approval process.

The approval process itself is often described in the operations manual rather than the FDD, but Item 16 establishes that it exists and binds the franchisee.

The franchisor's right to add new products

Most Item 16 disclosures expressly reserve the franchisor's right to add new required products or services during the term of the agreement, with the franchisee obligated to adopt them. This is the disclosure clause that supports system-wide rollouts of new menu items, new technology stacks, new third-party delivery integrations, and new service offerings. The franchisee typically bears the cost of adoption (new equipment, new training, new signage), and the franchise agreement does not always cap how much that cost may be.

The clause often does not cap the franchisor's right to drop products either. A successful regional product launched at unit level can be discontinued system-wide on franchisor decision, with no compensation to the franchisees who built local demand for it.

Customer restrictions

Item 16 may restrict who the franchisee can sell to. Common restrictions:

• National accounts reserved for the franchisor or for designated franchisees.
• Government / institutional accounts (military bases, schools, hospital cafeterias) reserved for franchisor-led negotiation.
• Wholesale or bulk customers outside the brand's primary retail channel.

These restrictions interact with Item 12 (territory). A franchisee may have an exclusive territory for retail sales but no right to sell wholesale, even within that territory.

Channel restrictions

Increasingly common, and the most likely to evolve year over year:

• Internet sales are usually restricted to the franchisor's own e-commerce site or to a system-wide platform. Independent franchisee web stores are rarely permitted.
• Third-party delivery platforms (DoorDash, Uber Eats, etc.) may be required, prohibited, or required only on franchisor-negotiated terms with mandatory commission rates.
• Catering and off-premises sales may require a separate addendum, separate insurance, or franchisor approval.
• Mobile units, kiosks, and pop-ups are typically reserved to the franchisor and not available to standard-format franchisees.

What it does NOT tell you

• Item 16 does not list the actual product catalog. The list of required and permitted products lives in the operations manual, which the franchisee receives only after signing. The FDD will tell you that such a list exists, but not what is on it.
• Item 16 does not disclose pricing. Whether the franchisor sets, recommends, or merely suggests retail prices is a separate question, governed by the franchise agreement and antitrust law. The FTC Franchise Rule does not require a separate pricing disclosure in Item 16.
• Item 16 does not estimate the cost of future product rollouts. When the franchisor exercises its reserved right to require a new product or technology, the franchisee absorbs the cost. Item 16 does not cap or quantify that future obligation.
• Item 16 does not promise stability. Almost every Item 16 reserves the franchisor's right to change the rules during the term. The catalog you buy into is not the catalog you will operate under in year five.

Red flags to watch for

When reading an Item 16, several patterns deserve attention:

1. Unbounded product-addition rights. Look for any limit on the franchisor's right to require new products — a cap on the cost the franchisee may be required to invest, a notice period, or a right of refusal. Most Item 16 clauses have none of these. The absence is not unusual but is worth understanding.
2. Internet and delivery-channel reservations. A clause reserving all internet sales to the franchisor means the franchisee cannot capture digital revenue from customers in their own territory. Combined with Item 12, this can shrink the effective territory considerably.
3. National-account carve-outs. If the franchisor reserves the right to sell directly to large customers in your territory, the territory protection in Item 12 may be narrower than it appears.
4. Reserved sales channels for franchisor expansion. Mobile units, kiosks, airport locations, college campuses, and grocery-channel placements are commonly reserved to the franchisor. If those channels become significant in your market, you have no participation right.
5. Cross-reference to Item 8 supply requirements. Item 16 says what you sell; Item 8 says what suppliers you must buy from. Restrictive Item 16 plus restrictive Item 8 means the franchisor controls both ends of the catalog.

Item 16 defines the operating envelope of the unit. Read it alongside Item 12 (territory), Item 8 (sources of supply), and Item 17 (term, transfer, and the franchisor's right to revise the system) to understand what flexibility you have — and don't have — to run the business as conditions in your market change.