It's hard to believe, but for those franchisors with a calendar year fiscal year end, the time has come once again to begin the process of updating the franchise disclosure document and preparing for state registrations. Although many of us may have just finished cleaning up the confetti from our holiday celebrations, now is really the time to put conscious thought into the FDD update in order to set yourself up for a successful year ahead.
If you work with us, you should have already received your Annual Report Questionnaire that we prepare for our clients, which addresses all of the issues and information that you will need to address for the annual update. The following are some additional issues that we suggest our clients consider during the process:
Updates: When filling out the Annual Report Questionnaire, the temptation exists to rush through the process by answering "Same as last year" to many of the questions. However, we consciously include these questions each year for several reasons – of course, to make sure that no system changes have occurred or will occur that need to be disclosed, but also in order to evoke a thought process with respect to issues that our clients may not have had the chance to address throughout the year during the daily hustle and bustle. If you have been considering a new marketing strategy, a different fee structure, or other changes to update and renovate your system, now is the time to put thought into those changes so that you can include them as part of the updating process.
Timing – Financial Statements: From a timing perspective, although the FTC Amended Rule provides franchisors with 120 days from their fiscal year end to prepare their updated franchise disclosure document, four states, California, Maryland, Minnesota and New York, still require audited financial statements to be prepared within 90 days from the fiscal year end. Accordingly, a franchisor who files its franchise application with these states more than 90 days after its fiscal year end may be required to include interim unaudited financial statements as well.
Timing – Renewal Dates: The other side of the coin on the timing issue is that with one exception, each state franchise registration will now terminate either 120 days after fiscal year end, or on the one year anniversary after the date of the registration. Some franchisors may want to consider waiting to file with certain states, so that their anniversary date coincides as closely as possible with the date that is 120 days after fiscal year end, the date by which annual updates are required by federal law. The exception to this strategy is in the state of Hawaii, where registration expires 90 days after fiscal year end by statute. Franchisors should consider this issue in conjunction with the financial statement issue noted above, to determine their optimal filing schedule this year.
Item 19: Surveys show that each year, more franchisors include a financial performance representation ("FPR") in their disclosure documents. A carefully structured FPR within Item 19 can be an important tool for franchisors during the sales process. Contrary to advice some attorneys give their clients, we find that a carefully prepared FPR usually decreases, rather than increases, legal exposure to franchisees for information provided during the sales process. This year in particular, Item 19 presents an opportunity for franchisors to highlight system recovery in light of improving economic conditions.
With some forethought, renewal season can provide the incentive that you need to take stock and make important changes in order to better your franchise system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
