OCR Franchise Agreement and Disclosure Document Scans

To OCR a franchise agreement buried in a scanned disclosure document, map the package first: the 23 numbered items, the lettered exhibits and the receipt pages. Split the scan along those lines, convert the agreement exhibit and any state addendum as their own files, export the fee and outlet tables as spreadsheets, and confirm which copy carries signatures.

A franchise package is long because a federal rule dictates much of its content, and that same rule gives you a map of the scan. This post is about handling the pages. It offers no view on whether any disclosure was adequate.

What comes in the scanned package with a franchise agreement?

A scanned franchise package holds a disclosure document with its cover page, table of contents and numbered items, then exhibits that include the form of franchise agreement, financial statements, other contracts, any state-specific pages and two receipt pages. A signed franchise agreement may be in the same scan or in a separate one.

The federal Franchise Rule requires some of this in terms. Item 22 of the disclosure document, at 16 CFR 436.5(v), reads: "Attach a copy of all proposed agreements regarding the franchise offering, including the franchise agreement and any lease, options, and purchase agreements." So the agreement inside the disclosure document is a proposed form. The copy your client signed is a different piece of paper, and telling the two apart is part of the job.

Ask early whether the scan you hold is the franchisor's file copy, the franchisee's copy, or a set gathered by a lawyer years later. The answer predicts what is missing. A franchisee's copy may lack the receipt page that was torn off and sent back. A franchisor's copy may hold the returned receipt and nothing else from that franchisee.

Copy the franchisor name, the franchisee name, the term, and each fee from the image of the signed franchise agreement. Read any service mark the grant names, and check a registration number if a schedule prints one. Note a royalty table by its page. Compare the signature dates on the agreement and on each state addendum.

How is a franchise disclosure document laid out?

A franchise disclosure document follows an order fixed by the Federal Trade Commission's Franchise Rule: a cover page, a table of contents, then 23 items in sequence, each under its own heading, with exhibits listed by letter. The rule's own table of contents is the checklist for your scan.

The cover page comes first. 16 CFR 436.3 requires it to begin with the title "FRANCHISE DISCLOSURE DOCUMENT" in capital letters and bold type, and to end its list of statements with the issuance date. The table of contents follows. 16 CFR 436.4 says: "State the page where each disclosure Item begins. List all exhibits by letter". The item titles in section 436.5 are these.

The "Mostly" column is a reading of the rule's instructions, which use the words "tabular form" for Items 6, 7, 9, 17 and 20, for the training program inside Item 11, for the financial statements of Item 21, and as an option for summarizing financing in Item 10. Your document may add tables elsewhere, so look at the pages.

Using the headings as anchors

16 CFR 436.6(c) tells the franchisor to "Precede each disclosure Item with the appropriate heading." That gives you 23 strings to search for in the converted text. Search for "Item 1" through "Item 23" and note the scan page of each hit that is a heading. Then compare your page numbers with the document's own table of contents. Three results are possible, and each tells you something:

• All 23 found, in order. The body is complete at the level of items.
• A heading not found. Look at the image where the table of contents says it should be. Bold capitals in a shaded bar can be dropped by recognition while the item is all there. If the pages are absent, you have a gap to report.
• A heading found twice. The scan may hold two disclosure documents, perhaps from different years, run together.

Cross-references that point into the agreement

Items 9 and 17 are tables that point from the disclosure document to the contract. The rule says of Item 9: "Cross-reference each listed obligation with any applicable section of the franchise or other agreement". Item 17 is to be "a table that cross-references each enumerated franchise relationship item with the applicable provision in the franchise or related agreement." Once both are converted, these two tables work as a finding aid. A row on renewal or transfer gives you the section number to open in the agreement exhibit. Read the section number against the image before you rely on it.

Converting a several-hundred-page franchise package in parts

Split the package at its natural seams and convert each part as its own file: front matter and Items 1 to 23, each agreement exhibit, the financial statements, the franchisee lists, the state addenda and the receipts. Smaller parts fit upload limits, and each one gets the export format that suits what it holds.

1. Count the pages and note the file size. Do it before anything else, so you know whether the scan fits your tool in one piece.
2. Convert the table of contents first, or read it from the image, and copy the item pages and exhibit letters into an index.
3. Find the first page of each exhibit. Exhibit cover sheets are short pages with a letter and a title. Record the scan page of each.
4. Split at the exhibit boundaries. Keep an exhibit's own attachments with it. A franchise agreement can have schedules and a guaranty bound behind it.
5. Name the parts with the exhibit letter and the issuance date. For a fictional franchisor, Copperline Bakehouse Franchising, LLC:

1. Convert each part. Use a searchable PDF for every part, Word for the agreement and addenda if you will quote or compare them, and a spreadsheet format for the fee tables and lists.
2. Add the parts' page counts and compare the sum with step 1. A split that drops a page is easy to make and easy to catch.

The mechanics of cutting an oversized file, and of bringing a scan under a size limit, are covered in the post on converting a large scanned PDF to Word online. For Schema Law, an upload is a PDF, PNG or JPEG of up to 20 MB, and the pricing page gives the page limit per document on each plan, so a 270-page package may need splitting on one plan and not on another.

Where not to split

Do not cut inside an item or inside the agreement. A break in the middle of Item 20 separates a table from its notes, and a break inside the agreement separates a section from the definitions it relies on. If the franchise agreement alone exceeds a limit, cut it between the body and its schedules and say so in the file names.

Fee tables and franchisee lists inside the disclosure document

Items 6 and 7 are fee and cost tables with a layout the rule prescribes, and Item 20 holds outlet tables and lists of franchisees. Convert these pages to a spreadsheet format so each fee and each outlet is a row, then read every amount, percentage and footnote mark against the image.

Items 6 and 7

The rule gives the column headings. Item 6 is a table titled "OTHER FEES" with columns for type of fee, amount, due date and remarks. Item 7 is titled "YOUR ESTIMATED INITIAL INVESTMENT" and has columns for type of expenditure, amount, method of payment, when due and to whom payment is to be made. Knowing the intended columns helps you spot an export that has merged two of them.

What to watch for in these tables:

• Ranges in the amount column. An entry such as "12,500 to 48,000" is one cell. An export may split it across two columns or drop the second figure.
• Formulas in words. A royalty stated as a percentage of gross sales is text in the amount column, not a number. Keep it as text.
• The remarks column. It can run to a paragraph per row. Wrapped lines may spill into the row beneath.
• Footnotes. Numbered notes under the table qualify the rows. Copy each note into its own row on a second sheet, keyed by the note number, and check that every superscript in the table survived conversion.
• The total row in Item 7. Recalculate the low and high totals from the rows. A mismatch points to a misread digit or to a row that went missing.

How software locates a table on a page image, and why columns drift, is explained in the post on scanned PDF to Excel. Initial fees are a different case. Item 5 has no prescribed table in the rule, so expect prose there and search it for the figures.

Item 20 and the franchisee lists

Item 20 has several numbered tables of outlet counts by year and by state, each with fixed columns. The counts are small whole numbers in a dense grid, and a column total that fails to add up is the quickest signal of a misread cell.

The lists are different. Under 16 CFR 436.5(t)(4) the franchisor is to "Disclose the names of all current franchisees and the address and telephone number of each of their outlets", with an alternative for listing by state. Paragraph (t)(5) calls for the name, city and state, and a telephone number for certain former franchisees. These lists can run to many pages and may sit in an exhibit. Convert them to rows with columns for name, street, city, state and telephone, plus a column for which list the row came from. Telephone numbers and postal codes are digit strings with no check built in, so sample them against the image.

The lists also contain personal contact details for people who are not parties to your matter. Decide who needs the converted spreadsheet before it circulates.

State addenda and riders that change the franchise agreement

As the terms are commonly used, a state addendum or rider is a set of pages that changes the disclosure document or the franchise agreement for transactions connected to a named state. Find every one in the scan, note which state each names and which document it amends, and then establish which of them was signed with your franchisee's agreement.

The federal rule leaves room for these pages. 16 CFR 436.6(e) says: "Franchisors may prepare multi-state disclosure documents by including non-preempted, state-specific information in the text of the disclosure document or in Exhibits attached to the disclosure document." 16 CFR 436.10(b) says the FTC "does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436." Which states have such laws, and what each requires, is outside this post. Check the law of the states your matter touches.

Finding the addenda in the converted text

Search the whole package, not only the exhibit labeled for addenda, since the rule permits state text in the body too. Useful searches are the word "addendum", the word "rider", each state's name, and phrases such as "the following provisions apply" and "notwithstanding anything to the contrary". Record each hit in a table.

Two kinds of addendum appear in that table, and they behave differently. An addendum to the disclosure document changes what the franchisee was told. An addendum to the agreement changes the contract and carries signature lines. A signed State A rider and a blank State B rider in one scan shows which one the parties signed. Whether a given state's law applies to the franchisee is a legal question for the lawyer, and the addendum's own opening words on when it applies are the text to put in front of them.

Reading an addendum against the agreement

An addendum works by reference: "Section 17.2 of the Franchise Agreement is amended by adding the following". For each such sentence, open the cited section in the converted agreement and confirm that the number exists and deals with the subject named. A section number misread in either document breaks the link. Insurance policies are altered by attached pages in a similar way, and the post on OCR of an insurance policy describes mapping each endorsement to the form it changes.

Which version of the franchise agreement did the franchisee sign?

Work it out from three things in the scan: the issuance date on the disclosure document's cover, the date written on the signed receipt, and a comparison of the signed agreement with the proposed form in the exhibit. Together they show which year's document the franchisee received and whether the signed text departs from it.

A file that spans several years may hold more than one disclosure document, each with its own issuance date and its own agreement exhibit. So the first task is to pin the signed agreement to one issuance.

The dates the rule puts on the page

• Cover page. The last of the cover statements required by 16 CFR 436.3(e) is "[The issuance date]".
• Receipt. Item 23 requires "two copies of the following detachable acknowledgment of receipt" as "the last pages of the disclosure document". The receipt must "State the issuance date", must include the sentence "I received a disclosure document dated __________ that included the following Exhibits:" and must "Provide space for the prospective franchisee's signature and date."
• Signed agreement. Its effective date and the dates beside the signatures.

A receipt is a form with a handwritten signature and date, so read it from the image. The rule also says, at 16 CFR 436.6(i), that franchisors "shall retain a copy of the signed receipt for at least three years" for each completed sale. If your scan lacks the signed receipt, the franchisor's records are one place to ask.

A version table

The table records dates and nothing more. Whether the intervals between them satisfy the waiting periods in 16 CFR 436.2 is for the lawyer to assess.

Signed copy against exhibit form

The signed agreement and the exhibit form should match except where blanks were filled and where the parties negotiated changes. Convert both to plain text or Word and run a comparison. The method, including how to separate recognition noise from real differences, is in the post on how to compare two scanned contracts. Expect three kinds of difference:

1. Filled blanks. The franchisee's name, the territory or location, the fee amounts and the dates.
2. Negotiated edits. Typed or handwritten changes, sometimes gathered in an amendment signed the same day.
3. A different base form. Section numbers that are offset throughout, or whole clauses present in one and absent from the other, suggest the signed copy was printed from another year's exhibit.

The third result matters most for the file, because it means the cross-references in Items 9 and 17 of the disclosure document you hold may not line up with the contract that was signed. Section 436.2(b) of the rule deals with a franchisor that alters the agreement's terms after disclosure, including a seven calendar-day period for furnishing the revised agreement. Record what differs and where, with page numbers, and pass it on.

Trademark license terms inside a franchise agreement raise the same reading problems as any license. The post on OCR of a license agreement covers finding the grant, the territory and the royalty terms in converted text.