For most franchisors, December 31 marks the end of their fiscal year and the beginning of the countdown to the day when their Franchise Disclosure Documents will “go stale”. Under the FTC’s Franchise Rule, every franchisor must update their FDD no later than 120 days after their fiscal year end. On top of that, their state franchise registration will need to be updated soon (in most cases). Here are some things that every franchisor should think about as they get ready for their annual FDD update:
1. Am I happy with everything in the Franchise Agreement? Because the FDD is going to need to be updated in any event, the annual FDD updating process is a great opportunity to take a closer look at how well the current franchise agreement works for the franchisor and to address issues that it has discovered through its experience over the last year. Making those changes during the annual FDD update will avoid the need to amend the FDD – and franchise registrations -- mid-year.
2. Do I have a Financial Performance Representation? The first question that nearly every franchise prospect asks is: “How much can I make?” Unbelievably, most franchisors do not use a financial performance representation in Item 19 of their FDD, so they cannot answer this question. For start-up systems, they may not have the data to support a financial performance representation initially, but they may develop enough data over time. Each year, it is a good idea to evaluate whether the franchisor can provide a financial performance representation so that its salespeople can engage in discussions with prospects about the financial details of the franchised business.
3. The early bird gets the worm. If a franchisor files franchise registration applications in any franchise registration states, filing as early as possible is a very good idea. The large majority of franchisors have December 31 fiscal year ends, so the large majority of franchise filings (new and renewal) that state franchise examiners see arrive between the middle of March and late April. This flood of filings creates a backlog. And, although the examiners do their best to move through the franchise filings as fast as possible, if your franchise application arrives in late April, you will be at the back of the queue.
4. Is this a good time to expand our geographic focus? If your franchise system has opted to focus its expansion on a few states, you probably haven’t bothered to submit franchise registration applications to all of the states that might require it. If that’s the case for you, now is a good time to re-evaluate whether your focus should expand to include additional states. If those states are registration states, it is probably most cost-effective to submit those franchise registrations as soon as the annual FDD update is complete.
5. Know your budget. Legal fees can have a life of their own if not planned for properly. Hourly rates can spiral out of control if, for example, a state examiner issues a number of comments to your FDD. Maslyn Law PLC offers our clients flat fee arrangements for FDD updates and for state franchise registrations (on a state-by-state, à la carte basis) to provide our clients with certainty that their legal fees will be what they agreed on. Contact us at 804-639-5501 or firstname.lastname@example.org if you would like a fee proposal for your company.