If your franchise company has a fiscal year end of December 31, early January is the time to begin the process of updating the Franchise Disclosure Document as required by the Federal Trade Commission’s FTC Rule. The FTC Rule requires that all franchisors update their FDDs within 120 days of their fiscal year end. So what does that mean and what should franchisors be doing?
1. Get the audit process started. Promptly following the year end, contact your auditor to get the audit process started and gather all information that your auditor will need. Getting the audit done in advance of the update deadlines means avoiding having to stop selling franchises if your new FDD can’t be issued because year-end audited financial statements are not yet available.
2. Get the state filing deadlines on the calendar. In addition to the 120 day deadline under federal franchise law, know your state filing deadlines as your FDD may have to be completed earlier than the 120th day following the fiscal year end in order to meet a state filing deadline and to avoid losing a state franchise registration. While some states also require that the FDD be updated and a renewal application be filed within 120 days of the fiscal year end, some states have shorter deadlines (such as Hawaii which has a deadline of 90 days from the fiscal year end and California which has a deadline of 110 days from the fiscal year end) or have renewal dates of one year from the previous registration date.
3. The earlier, the better. File state registration renewal applications early, if at all possible. Since most franchisors have a fiscal year end of December 31, state franchise regulators are swamped by April with franchisor renewal applications. In order to get quicker turnaround time on state approvals of the renewal applications, which can ease the transition process of disclosing pending prospects during the FDD update period, the earlier you can file the renewal application the better. Franchisor attorneys are also swamped as the 120 day deadline gets closer and closer, so it is wise for franchisors to start the process early with their attorneys as well.
4. Consider this time as an opportunity, and don’t look at the annual FDD update as a merely administrative process.
- What updates need to be made? This is the time for everyone in the franchise company who has information on FDD disclosures to carefully review the document and to determine if any material changes have occurred in the information disclosed in the FDD. Those changes should be then communicated to franchise counsel to be included in the update. Under the federal and state franchise law, franchisors have an obligation to update the FDD when material changes occur. Although the FTC Rule and some state franchise laws do not specifically define “material change,” the Illinois franchise statute provides that a change is material if there is a substantial likelihood that a reasonable prospective purchaser would consider it significant in making a decision to purchase or not purchase the franchise.
- Time to implement desired changes. This is the time to implement changes in the franchise program or changes in fee structure that have been discussed during the previous year. Including these changes with the annual FDD update means avoiding having to amend the FDD and file state amendment applications during the year, which means added cost and additional time when franchise sales may have to be put on hold.
- Is now the time to add FPRs? If you are not currently making any financial performance representations in Item 19 of the Franchise Disclosure Document, consider whether now is the time to add them. About half of the franchisors are now using financial performance representations to provide more information for prospective franchisee as they investigate the purchase of a franchise. Since FPRs cannot be prepared hastily, start the discussion early, review the financial data that you have available to you, and discuss options with your franchise attorney.
- Get input from your franchise attorney. This is also the time for franchise legal counsel to suggest changes to the FDD or to the Franchise Agreement to reflect any changes that have occurred in the law, to address current requirements of state regulators, or to otherwise improve the enforceability or effectiveness of your Franchise Agreement.
Following these tips will provide for a smoother transition to the newly issued FDD and help ensure compliance with federal and state franchise laws. Contact the attorneys at Carter & Tani for assistance in updating your franchise legal documents for the coming year.