Key Items to Watch out for in the ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. 2019 FDD
Please consider the following RISK FACTORS before you buy this franchise: 1. THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US ONLY IN COLORADO, EXCEPT FOR FRANCHISEES IN THE STATES OF CALIFORNIA, IDAHO, ILLINOIS, IOWA, MINNESOTA, RHODE ISLAND AND SOUTH DAKOTA, WHERE THE FRANCHISE AGREEMENT REQUIRES THAT DISPUTES ARE SUBMITTED FIRST TO NON-BINDING ARBITRATION IN COLORADO AND, FAILING SETTLEMENT, THEN ARE LITIGATED. OUT-OF-STATE NON-BINDING ARBITRATION AND LITIGATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO SUBMIT DISPUTES FIRST TO NON-BINDING ARBITRATION OR TO LITIGATE WITH US IN COLORADO THAN IN YOUR HOME STATE. 2. THE FRANCHISE AGREEMENT STATES THAT COLORADO LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. IS NOT OBLIGATED BY THE FRANCHISE AGREEMENT OR OTHERWISE TO PROTECT ANY RIGHTS WHICH THE FRANCHISEE HAS TO USE THE TRADEMARKS OR TRADENAMES. THIS MEANS THAT THE FRANCHISEE MAY BE REQUIRED TO COMMENCE LEGAL PROCEEDINGS AT ITS OWN EXPENSE TO PROTECT ITS PROPERTY INTEREST IN THE ROCKY MOUNTAIN CHOCOLATE FACTORY TRADEMARK, OR TO DEFEND, AT ITS OWN EXPENSE, ANY ACTION WHICH MAY BE BROUGHT AGAINST IT FOR INFRINGEMENT. THESE FACTORS SHOULD BE TAKEN INTO ACCOUNT IN DETERMINING WHETHER OR NOT TO PURCHASE THIS FRANCHISE. 4. THE FRANCHISOR RESERVES THE RIGHT TO ESTABLISH COMPANY OWNED OR FRANCHISED OPERATIONS WITHIN THE FRANCHISEE’S DESIGNATED AREA SELLING THE SAME OR SIMILAR PRODUCTS AS THOSE DESCRIBED IN THIS DISCLOSURE DOCUMENT, BUT UNDER DIFFERENT TRADENAMES OR TRADEMARKS THAN DESCRIBED IN THIS DISCLOSURE DOCUMENT. 5. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
We reserve the right to use the services of one or more FRANCHISE BROKERS or referral sources to assist us in selling our franchise. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should be sure to do your own investigation of the franchise.
Item 5: Initial Fees
You must pay a non-refundable initial franchise fee of $25,000 in full when you sign the Franchise Agreement for your ROCKY MOUNTAIN CHOCOLATE FACTORY Store. Unless agreed in writing by us and you, we may terminate your Franchise Agreement if you fail to open your Store within 180 days after you sign the Franchise Agreement and in this case, we will refund $5,000 of your initial franchise fee. We are offering a $10,000 discount from the initial franchise fee for franchisees who are in good standing and wish to open an additional Store, and for qualified veterans.In addition, we are offering a first franchise for an initial fee of only $5,000 to our employees and to college students at schools that participate in our University Program. Individuals who are affiliated with us may also pay reduced initial fees. We do not give refunds of these amounts, once paid, under any circumstances. See Item 7. We offer no financing for the initial franchise fee. See Item 10.
You must also pay between $7,500 and $22,285 to us for opening Factory Candy inventory and cooking supplies for a full-sized Store within 30 days after the products are shipped to you. These costs are nonrefundable in all circumstances. See Item 7. During our fiscal year ended February 28, 2018, all franchisees paid the same initial fees with the exception of two franchises sold at a discount to college students who were awarded the franchises as the winner of a competition that is part of a class on entrepreneurship through our University Program. Except as explained above, all franchisees currently acquiring a franchise pay the same initial fees.
Item 8: Restrictions on Sources of Products and Services
Operations. You must establish and operate your Store in compliance with your Franchise Agreement and the operations manual we loan to you, in the form of several manuals, technical bulletins, cookbooks and other written materials (collectively, “Operations Manual”), which we may modify occasionally, inour sole discretion. All products, equipment, furniture, fixtures, services, supplies, materials, uniforms, recipes, marketing, advertising, inventory items and all related products and services that you use or offer for sale through your Store must meet the minimum standards and specifications in our Operations Manual. You must sell only Factory Candy, Store Candy and Items that we designate. If you want to sell other products, you must first receive our written consent, which we may withhold in our sole discretion. You may not sell any products resembling Factory Candy manufactured or sold by us unless you first receive our written consent. In addition, your Store must devote at least 50% of its retail display space to ROCKY MOUNTAIN CHOCOLATE FACTORY bulk chocolates and packaged Factory Candy either manufactured or sold by us. The only Store Candy you may sell that we do not supply is candy made at your Store that you prepare from recipes found in our Operations Manual through the process of molding, cooking and dipping foods such as cookies, crackers, pretzels, fresh and dried fruit, dog bones and plain chocolates, but you may sell them only if you prepare them according to our recipes and specifications. We will provide you with these recipes and specifications in the Operations Manual. You may not purchase, manufacture or sell any product or service, unless we first consent in writing.
Purchases From Designated or Approved Suppliers. You must purchase all of the Factory Candy, ingredients for Store Candy and other Items that you sell at or through your ROCKY MOUNTAIN CHOCOLATE FACTORY Store from us or a source we designate. We are the designated supplier of ROCKY MOUNTAIN CHOCOLATE FACTORY-branded Factory Candy. You must purchase all products and services that you require to operate your Store from manufacturers, distributors or suppliers we designate or approve, or who meet our standards and specifications. None of our officers owns an interest in any approved or designated suppliers, other than RMCF. We derive revenue from the sale of Factory Candy, Store Candy ingredients, packaging materials, other Items and certain services to you. In the fiscal year ended February 28, 2018, our revenue from purchases by franchisees was $17,172,100 or 45% of our total revenues of $38,074,695. Seeour financial statements in Item 21. We estimate that the costs of your purchases from designated or approved sources, or according to our standards and specifications will range from 80% to 84% of the total cost of establishing your Store and approximately 38% of the total cost of operating your Store after that time. We are not affiliated with any approved or designated suppliers. If you propose to offer, conduct or utilize any products, services, materials, forms, items or supplies for sale or use in your ROCKY MOUNTAIN CHOCOLATE FACTORY Store from manufacturers, suppliers or distributors which we have not previously approved as meeting our specifications, you must first notify us in writing requesting our approval. We may, in our sole discretion, and for any reason, withhold our approval. Our criteria for supplier approval are available to you upon request. We base our approval on quality, vendor reputation, pricing and our opinion about the compatibility of the product or supplier with our brand image and product line. We may require that samples from a proposed new supplier be delivered to us for testing before we approve the product or supplier. You are required to reimburse us for the actual cost of conducting the test. We will advise you within 60 days whether the product or supplier meets our specifications. We may revoke our approval if we determine the product or supplier no longer meet our published standards. We require all franchisees to purchase pre-recorded music from our designated music supplier. If there is no designated or approved supplier for a particular item, you must purchase all products and services from other suppliers who meet all of our specifications and standards. We formulate and modify our specifications and standards based on quality, composition, finish, appearance and service. Suppliers must adequately demonstrate their capacity to supply your needs, in the quantities, at the times and with the reliability requisite to an efficient operation. We may change our standards and specifications, or suppliers who have our authorization, at any time if we give you 30 days written notice in advance.
Store Build-Out and Lease You must, at your expense, construct, convert, design and decorate the Franchised Location in accordance with our plans and specifications and with the assistance of contractors, architects and suppliers designated or approved by us. First-time franchisees must use one of our designated fixture contractors for the build-out of their Stores and we reserve the right to require experienced franchisees to use a designated contractor as well. We require that you obtain our written consent to any improvements to the Franchised Location before construction begins. We must approve any purchase agreement and any lease or sublease (the “Lease”) for the Franchised Location of your Store before you sign the purchase agreement, lease or sublease. A copy of the signed Lease is to be delivered to us within 15 days after you sign it. Your Lease must include the following provisions: (1) allowing the tenant under the Lease to assign the Lease to us if the Franchise Agreement is terminated or not renewed; (2) requiring the landlord to give us written notice of any defaults by you under the Lease and the right to cure the defaults; (3) allowing us to assume the Lease and to sublease the premises to you; and (4) allowing us to enter the leased premises to cure any defaults under the Franchise Agreement or to protect the Marks and Licensed Methods. You are responsible for obtaining the landlord’s consent to these provisions. If you have already signed a lease or you have already purchased a location for your Store when you sign the Franchise Agreement, our execution of the FranchiseAgreement does not imply that we approve of any particular location.
Equipment, Furnishings and Fixtures You must purchase display cabinets, cooking equipment, storage fixtures, refrigeration equipment, and all other fixtures and furnishings in your Store from suppliers designated or approved by us.
POS System, Software and Other Technology You must purchase a computerized point of sale system meeting our specifications (together with the software, referred to as “POS System”) from a designated supplier. The POS System allows us to download certain sales and other information related to retail operations that we specify. We derive no revenue from your purchase of the POS System. You must also have a back office personal computer and bookkeeping software that are compatible with Microsoft products. We recommend QuickBooks for bookkeeping software. See Items 7and 11. We reserve the right to require, upon 30 days prior written notice to you, that you purchase additional hardware and software meeting our specifications.
Advertising and Marketing All marketing and promotion of your Store must conform to our standards and specifications. You must submit to us samples of all advertising and promotional materials which have not been prepared or previously approved by us. See Items 6and 11. Your Store must participate in promotions and public relations campaigns (e.g., contributions to charitable events) we institute from time to time for all ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, or for all Stores within a particular geographic area. You must also participate in customer service, community service programs, complimentary product promotions, customer loyalty, gift card and other promotional programs, that we may reasonably determine are needed in your particular Store. We reserve the right to develop and control all advertising media including but not limited to the following: Print (direct mail, magazine, newspaper, in-store signage, posters, etc.) broadcast (radio, television, etc.) and electronic (websites, ecommerce, email, social media, internet advertising, etc.) We reserve the right, upon 30 days prior written notice to you, to require that you participate in any such electronic advertising. All ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, including any owned by us, must participate in these programs or other promotions that we may adopt in the future.
Insurance You must maintain certain types and amounts of insurance coverage described in the Operations Manual and in the Franchise Agreement. These types of insurance include comprehensive general liability, products liability, unemployment and worker’s compensation, personal property, and owned and non-owned auto liability coverage. If you fail to purchase this insurance, we may demand that you cease operations or obtain insurance for you and you must reimburse us for the cost of the insurance. All insurance policies must name us as an additional insured and give us at least 30 days prior written notice of termination, amendment or cancellation. You also must provide us with certificates of insurance evidencing your insurance coverage before the opening of your Store. You must furnish us with copies of all required insurance policies or other evidence of insurance coverage and payment of premiums as we request from time to time. We reserve the right to require you to change the type of insurance you are required to maintain and upon prior reasonable notice, we may revise the required coverage limits.
Purchasing Arrangements Currently, we maintain purchasing arrangements for the supply of certain raw materials for the preparation of Store Candy, such as fudge, brittles and caramel, packaging items such as bags and tins, and other items. During our last fiscal year, we did not receive any rebates, incentives or overrides by third-party suppliers from whom you buy items. We estimate that any purchases by you for which we collect a fee will constitute less than 3% of the total cost of establishing your Store and less than 3% of the total cost of operating your Store. We may, in our discretion, either retain a credit or rebate received as a result of your purchases or contribute the funds to the Marketing Fund. You should not rely on the continued availability of any particular pricing or distribution arrangement, nor on the availability of any particular product or brand in deciding whether to purchase the franchise. Except as described above, we do not negotiate purchase arrangements with suppliers for the benefit of franchisees, although we reserve the right to do so. We have no purchasing or distribution cooperatives. We do not give you any material benefits based on your use of designated or approved sources or suppliers.
Gift Card and Other Promotional Card Programs You must participate in our gift card program, referred to as the “Gift Card Program” in this Disclosure Document. You may also be required to participate in other prepaid card, rewards card or customer loyalty programs (each, a “Card Program”) that we implement from time to time. We agree to provide you with at least 30 days’ notice before you must start participating in a new Card Program. You must follow the guidelines set forth in the Operations Manual with respect to your obligations and responsibilities under a Card Program, the methods of operation for a Card Program, the transaction information you are required to provide to us and the retention of complete and accurate books and records regarding transactions made in compliance with the terms of a Card Program. As of the date of this Disclosure Document, you must participate in our Gift Card Program by signing agreements with our designated gift card program vendor attached as Exhibit VII to the Franchise Agreement. You may pay a monthly fee to the vendor depending on whether you use the designated gift card vendor to process credit cards and depending on the sophistication of the POS System in your Store. See Items 6and 11 for more information. We reserve the right to require you to purchase and utilize processing equipment and software designated by us for the Gift Card Program or another Card Program. In order to enable you to comply with applicable state laws and regulations, the funds you receive in connection with the sale, activation and reloading of prepaid cards, gift cards, rewards cards or similar promotional cards, and the subsequent transactions which are made by the holders of the cards will be accounted for separately from other sales made at your Store. We reserve the right to collect the funds you receive in connection with the sale and activation and reloading of prepaid cards, gift cards, rewards cards or similar promotional cards for reconciliation of the cardholder revenue and debited cardholder sales. You are responsible for compliance with all federal and state laws that regulate gift and stored value cards, including any unclaimed property laws in your state. We reserve the right to charge you transaction fees to activate, reload, redeem and otherwise administer the Gift Card Program and any other Card Program that we may require in the future. You may be required to sign an addendum to your Franchise Agreement in the future as a condition of participation in a Card Program. Additionally, we have the right to audit your books, records and processes relating to all Card Programs. You must pay the costs of an audit if the audit reflects an underpayment of more than 5% during the period reviewed.
Optional Programs If you participate in one of the Optional Programs that we may make available to you from time to time, depending on the program, you may be required to purchase from us, our affiliates, or another designated source, specified products, supplies or services made available for sale through your Store. You may also be required to obtain training from a designated source in order to participate in the Optional Program. If the required purchases through one of these programs are from us, we will typically derive revenue from those sales or from any related provision of services under the Optional Program.We will publish any Optional Program training requirements, purchase requirements and other program terms and conditions to help you decide whether to participate in an Optional Program.
Item 10: Financing
We do not offer direct or indirect financing. We do not guarantee your note, lease or obligation.
Item 12: Territory
You will operate your ROCKY MOUNTAIN CHOCOLATE FACTORY Store at a specific location that is referred to as the “Franchised Location” in the Franchise Agreement. We must approve your Franchised Location before you sign a Franchise Agreement. The designation of your Franchised Location does not grant you the exclusive right to any particular market or customers. You may advertise your ROCKY MOUNTAIN CHOCOLATE FACTORY Store anywhere, provided that you receive our prior approval of all advertising and you do not violate the terms of any national, regional or co-op advertising group of ROCKY MOUNTAIN CHOCOLATE FACTORY Stores. Other ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees have the same rights to advertise. See Item 11 for more discussion of advertising.
You may not relocate your Franchised Location without our prior written approval. If you have operated your ROCKY MOUNTAIN CHOCOLATE FACTORY Store for at least 12 months and you desire to change its Franchised Location, you may send us a written request explaining your reasons and proposing an alternative location. If we approve an alternative location in writing, you must pay us a Design Fee of $2,500 (see Item 6), sign our then current form of Franchise Agreement, and you must complete the move and open your new Franchised Location within 12 months from the date the Store at the prior Franchised Location closes. Upon relocation, you may not change the owners or your percentage ownership interests from that of the prior location unless you comply with the transfer provisions in the Franchise Agreement. You must sign the Relocation Amendment to the Franchise Agreement attached to this Disclosure Document as Exhibit H-3 if you relocate your Store.
You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control. You have no option, right of first refusal or similar contractual right to acquire additional ROCKY MOUNTAIN CHOCOLATE FACTORY franchises. You may face competition from co-branded Cold Stone Creamery Stores offering ROCKY MOUNTAIN CHOCOLATE FACTORY products, from other retailers offering ROCKY MOUNTAIN CHOCOLATE FACTORY products, from co-branded USWIRL stores, co-branded ASPEN LEAF stores, co-branded YOGURTINI stores, co-branded CHERRYBERRY stores, co-branded YOGLI MOGLI stores, co-branded FUZZY PEACH stores or from co-branded LET’S YO stores offering ROCKY MOUNTAIN CHOCOLATE FACTORY products. As of the date of this Disclosure Document, we ownU-SWIRL, LET’S YO, YOGURTINI, CHERRYBERRY, YOGLI MOGLI, FUZZY PEACH and ASPEN LEAF brands due to our ownershipin USI. As of the date of this Disclosure Document, we own five (5) U-Swirl Stores. We do not own any ASPEN LEAF, LET’S YO, CHERRYBERRY, YOGLI MOGLI, FUZZY PEACH or YOGURTINI stores and have no plans to acquire any. We own some ROCKY MOUNTAIN CHOCOLATE FACTORY Stores and we sell products in alternative channels of distribution, including in certain big-box retail locations. U-Swirl International, Inc. (“USI”) offers franchises for U-SWIRL, LET’S YO, ASPEN LEAF, CHERRYBERRY, YOGLI MOGLI, FUZZY PEACH and YOGURTINI frozen yogurt stores and for cobranded stores that also sell our products undera separate disclosure document that is only available from USI. We also have an agreement with Cold Stone Creamery, Inc. (“Cold Stone”) whereby Cold Stone offers co-branded stores that sell COLD STONE CREAMERY products and our products under a separate Disclosure Document that is available from Cold Stone. In the past, we also co-branded stores with a different frozen dessert franchisor. You have no option, right of first refusal or similar contractual right to acquire additional ROCKY MOUNTAIN CHOCOLATE FACTORY franchises.
We may establish other related franchises or company-owned Stores that sell or lease similar products or services under a different name or trademark. We retain the rights, among others: (1) to use, and to license others to use, the Marks and Licensed Methods for the operation of ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, including Kiosk Stores, Satellite Stores and Temporary Stores, at any location other than at the Franchised Location; (2) to use the Marks and Licensed Methods to identify services and products, promotional and marketing efforts or related items, and to identify products and services similar to or the same as those which you will sell, but made available through alternative channels of distribution other than through traditional ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, at any location other than at the Franchised Location, including through Satellite Stores, Temporary Stores, Kiosk Stores, co-branded stores, by way of mail order (including electronic mail order), the Internet and Electronic Advertising as defined in the Franchise Agreement, which includes blogs and social media such as Facebook and Twitter, by way of catalogs, telemarketing, other direct marketing methods, television, retail store displays or through the wholesale sale of products to unrelated retail outlets or to candy distributors or outlets located in stadiums, arenas, airports, turnpike rest stops or supermarkets; and (3) to use and license the use of other proprietary marks or methods in connection with the sale of products and services similar to those which you will sell or in connection with the operation of retail stores selling gourmet chocolates or other premium confectionery products, at any location other than at the Franchised Location, which stores are the same as, or similar to, or different from a traditional ROCKY MOUNTAIN CHOCOLATE FACTORY Store, a Kiosk Store or a Satellite Store or a Temporary Store, on any terms and conditions as we deem advisable, and without granting you any rights in them.
Your continuation of the right to operate the Store during the term of the Franchise Agreement does not depend on the achievement of any certain sales volume, market penetration or similar contingency. Although in some instances, we grant a franchisee a right of first refusal on a neighboring or extended territory, you have no option, right of first refusal or similar contractual right to acquire additional Stores within a territory or in areas contiguous to your Stores. We have no present plans to establish other franchises or company-owned businesses selling similar products or services under a different name or trademark, although, as stated above, we reserve the right to do so.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
You (or your managing partner or principal shareholder) are not required to participate personally in the direct on-premises operation of your Store although we strongly urge you to do so. If you (or your managing partner or principal shareholder) do not participate in the day-to-day operation of the Store, you must designate a manager (“General Manager”) to be responsible for the direct on-premises supervision of the Store at all times during its hours of operation. If you are a Business Entity, we do not require that your General Manager own an equity interest in you. You (or your managing partner or principal shareholder) or, if applicable, the General Manager, must successfully complete our mandatory initial training program. You and your managers must enter into a confidentiality and noncompetition agreement with us (Exhibit VI to Franchise Agreement). Other than the foregoing, we make no recommendations and have no requirements regarding employment or other written agreements between you and your employees. We may require each of your officers, directors, principal shareholders, partners and/or members to sign an agreement (Exhibit II to Franchise Agreement) personally guaranteeing and agreeing to perform all of your obligations under the Franchise Agreement.
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You must offer for sale through your Store only the Factory Candy, Store Candy and Items that we approve in writing. The authorized vendor list, which is part of our Operations Manual, describes the full line of products identified with ROCKY MOUNTAIN CHOCOLATE FACTORY Stores. We may change the types of authorized products and services, and do not limit our right to do so, although we provide you with written notice 30 days before any change becomes effective.
You must devote a minimum of 50% of all retail display space to Factory Candy, or in other words, chocolates and packaged candies either manufactured or sold by us. The other edible items we permit you to serve, make and sell through your Store are store-made candies that you prepare from recipes and specifications in the Operations Manual, through the process of molding, cooking and dipping various foods, such as cookies, crackers, pretzels, fresh and dried fruits, dog bones, plain chocolate and other items we approve in writing, in our sole discretion. We refer to these other edible items as “Store Candy” throughout this Disclosure Document. All Factory Candy, Store Candy and Items must be sold in containers or bags that we approve.
You must obtain our consent in writing before you operate food carts, participate in food festivals or offer any other type of off-site services using our Marks and Licensed Methods. See Exhibits G-1 (Satellite Store) and G-2 (Temporary Store) to this Disclosure Document. You will also offer gift cards through our Gift Card Program. See Exhibit VII to the Franchise Agreement. If you choose not to participate in one of our Optional Programs or you for any reason lose your authorization to do so, or you are not eligible to participate based on a supplier’s requirements, you may not offer to sell the products, supplies or services subject to that Optional Program.
You must not offer any other type of product or service, or operate or engage in any other type of business or profession, from or through your Franchised Location, including offering candy classes or filling “wholesale orders,” which we define in the Franchise Agreement as those orders or sales where the principal purpose of the purchase is for resale, not for consumption, or any sale other than over-thecounter sales at a price other than the price charged to the general public. We permit volume discounted sales made at the Franchised Location to a single purchaser, not for resale, and discounted sales made at the Franchised Location to charitable organizations for fund-raising purposes with our prior written consent. See Items 1and 6 for more information.