Updating FDDs everywhere
You just celebrated the end of 2018. Did you close your franchise system’s fiscal year the same day? December 31, 2018, is a typical fiscal year-end date for most companies – franchises included. But whatever day your business year ends, a countdown clock to your deadline to update your franchise disclosure document (FDD) starts ticking.
No matter where your franchise is headquartered, the Federal Trade Commission (FTC) Rule requires you to update your FDD within 120 days of your fiscal year end. Sounds like a lot of time, but…not when you have documents to get in order and a business to run. Most franchisors are familiar with this process and use the annual updating requirement to review their franchise programs and make modifications to the FDD, franchise agreement and other exhibits.
However, added to the FTC Rule, a number of states also require franchisors to update and submit their disclosure documents every year. State requirements and filing deadlines vary. Some mirror the FTC 120-day rule; others require your renewal within a year of your initial registration. Depending on the state(s) in which you operate and/or sell franchises, your annual renewal filings must be made within 90 to 120 days following the end of your fiscal year or prior to the anniversary of the effective date of your franchise registration. Check dates and deadlines – both for your headquartered state and for every state into which you sell franchises. And then, plan accordingly. Make sure you update the information in your FDD to be current as of your fiscal year end and in advance of the franchise registration expiration date
How can you track expiring franchise registrations?
Most franchisors and their advisors create a compliance checklist or table (like this example created by the International Franchise Association) to track the various state and federal effective and expiration dates
[table id=1 /]
What happens if you fail to file your renewal application?
If you do not file your renewal application in a registration state as required, and, if necessary, have your FDD approved prior to the expiration date, you will go “dark” in that state. You must halt all franchise sales and are not permitted to even offer to sell franchises in that state until you have filed the franchise registration application and, if required, obtained state approval.
If you let your registration expire, some states also require you to refile as though you were a first-time applicant – which commands a higher fee, or to file a reinstatement application or equivalent
Is the annual update to the FDD all I need to stay legally compliant?
No. In addition to annual updates, you must amend your FDD if there is a material change to the information. That amended FDD will also have to be filed in any registration states. Be aware that the definition of a “material change” can be broad and includes anything significant that could influence a prospective franchisee’s investment decision. From a practical standpoint, the most frequent types of “material changes” that require FDD updates or amendments involve:
- management personnel changes;
- mergers and acquisitions involving the franchisor;
- new litigation or arbitration or significant developments in existing cases;
- changes to the franchise agreement, fees or franchise program;
- changes in existing franchisees (including unilateral terminations by franchisees); and
- adverse changes in the franchisor’s financial status.
Share the updates with your team.
Make sure your internal team is aware of the differences between your previous FDD and your updated FDD. Ensure they understand what has changed and why. Let them know how and when the updated information will be distributed to them and when they (and you) will release the updated FDD to prospective franchisees. Let your team know in which states you are filing and registering the updated FDD, as well as any “dark” periods in registration states. Note: Remember to re-disclose the new FDD to all prospects in your sales pipeline.
Bottom line: Miss a deadline, forget to submit your paperwork and your business stops dead in its tracks. So, be prepared. Given the strict deadlines, planning is critical. Don’t wait until the last moment. Consult with your financial and legal advisors to set up a schedule to process your FDD update. Let them know what your FDD renewal deadlines are so they can plan accordingly to help you meet them. Or, contact me, Julie Lusthaus at [email protected] and let’s talk.