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should use renewal season as an excuse to spend some time with their FDDs to make sure they don’t include any outdated information.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.
Advice for Women Business Owners: How to Achieve Success and Sanity
Just imagine yourself as a successful female entrepreneur, running the type of business that keeps you fulfilled in life, while you have the freedom to live your dreams. What does this look like to you? Do you spend your days traveling the world with the love of your life? Do you work remotely from home so you can spend more time with your children while they are still young? Are you setting an example for young women who aspire to reach your level of success someday?
Personality Test: Are You Fit to Work From Home?
Have you had daydreams of working from home? Of course you have! Whohasn'timagined lazily rolling out of bed, pulling on their slippers, brewing a cup of coffee, and casually strolling into the next room to start “working from home"? It may sound like a fantasy, but working from home (running a home-based franchise or other home-based business) isn’t as easy as it's often made out to be.
Strategic and Structural Alternatives to Franchising
These are difficult decisions. The solutions are not clear cut from a business or from a legal perspective. It is critical that a company in this position work with qualified counsel to identify an alternative that will have a reasonable basis for an exemption and still make sense from a strategic perspective. The balance of this chapter will look at the many alternatives currently being tested by many U.S. and oversees companies. As you can see, the lines of demarcation are not always clear. The differences between many of these alternatives may in fact be in name only. Some of these concepts are truly innovative and have not been truly tested by the courts or the regulators. In these borderline cases, a regulatory “no-action” letter procedure is strongly recommended. Other concepts are not very innovative at all and merely borrow from long-recognized and analogous legal relationships such as chapter affiliation agreements in the non-profit arena or network affiliation agreements in radio and television broadcasting.