Get Your Franchise Audits and FDDs Done Early for Renewal Season
Every year, franchisors are required to update their Franchise Disclosure Documents (FDDs). For most franchisors, the deadline for annual updates falls on April 30 — 120 days after their fiscal year-end. While this deadline is imposed under the Federal Trade Commission’s (FTC) Revised Franchise Rule, for many franchisors the federal deadline also coincides with their renewal deadlines in the various states that require franchise registration or exemption filings. As a result, many in the franchise industry refer to this time of year as “renewal season” for franchisors.
Renewal season means different things for different people. Here are a few important tips to keep in mind:
For Active Franchisors
For active franchisors, renewal season means keeping on top of deadlines, interacting with your franchise lawyer, and pushing to get that all-important audit done in time to avoid falling into a “dark period” when you aren’t legally allowed to sell new franchises.
The FDD includes certain disclosures – such as ad fund expenditures and listings of existing outlets – that need to be revised on an annual basis. Beyond that, items such as the estimated initial investment costs, computer system requirements, and litigation history may need to be updated as well (and this is by no means an exclusive list). Franchisors should use renewal season as an excuse to spend some time with their FDDs to make sure they don’t include any outdated information.
Certain states mandate that renewal filings be made at the same time the federal updates come due. Even in the states that don’t, it may make sense to try to get all of your filings on the same schedule to reduce the administrative burdens of compliance. Missing a renewal deadline and offering an unregistered franchise opportunity can have significant negative consequences—including a requirement to offer to rescind the franchise agreement.
For Aspiring Franchisors
For new franchisors, renewal season is worth keeping in mind from the practical perspective that it will likely take much longer to obtain initial registration if you submit your applications at the same time that thousands of franchisors nationwide are applying for renewal. The state agencies that administer franchise registrations were not immune to the economic downturn, and several simply don’t have the staff needed to promptly address applications as they come in the door.
So, for companies in the process of developing a franchise system, consider planning to file either very early in the year or else after the summer solstice to avoid delays in registration.
For Prospective Franchisees
Renewal season can also have relevance for individuals looking to purchase a new franchise opportunity— particularly in states requiring franchise registration. If a franchisor, for one reason or another, isn’t able to meet its annual renewal deadlines, it won’t legally be able to offer you a franchise. This can mean one of two things: (a) the franchisor actually won’t offer you a franchise, or (b) you may be offered an unregistered franchise opportunity. The former obviously has important practical ramifications; the latter can have significant legal implications as well.
Jeff Fabian is a franchise and trademark lawyer who represents both franchisors and franchisees. He can be reached at 866.545.7859, or online at www.fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.
This article is provided for informational purposes only, and does not constitute legal advice.
The first point I made ties into this, but you need to make sure you’ve done your research before you go ahead and sign a franchising agreement. And that doesn’t just mean from a financial perspective. There are so many other aspects in running a franchise that you need to understand before you get started. Most of this information can be found in the Franchise Disclosure Documents. Some of the most important things you should take a look at would be any legal issues the franchisor might have and the churn rate of franchises. Both of those could potentially be pretty significant red flags that might make you want to reconsider whether or not you want to open that franchise.
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