Top FDD Renewal Questions Answered
Franchisors are required to update their Franchise Disclosure Documents (FDD) annually as a matter of law as well as when there is a material change to the information contained in the FDD. Franchisors can also choose to update their FDDs if they want to make a change to the franchise offering.
Let’s answer some critical questions about the FDD updating and renewal process so that franchisors can protect their system and franchisees, and also capitalize on unique opportunities.
Annual Updates To The FDD
Federal law and state franchise disclosure laws require franchisors to update their FDDs annually. Under federal law, it must be done within 120 days following the end of the franchisor’s fiscal year-end. A fiscal year or “tax year” is an annual accounting period for keeping records and reporting income and expenses. Some states follow the federal requirement, others impose a different deadline for renewal. While December 31 does not always mark the end of the franchisor’s fiscal year, for those with a calendar fiscal year, January is a good time to start the renewal process and review the FDD with your NY franchise lawyers.
At a minimum, annual updates will include changes to Item 8, Item 20, and the franchisor’s financial statements. If the franchisor includes an Item 19, that will have to be revised each year as well.
In addition to complying with legal requirements, the renewal process is a good time for franchisors to update their FDDs to reflect industry changes, new market conditions, and changes in their franchise systems. Indeed, many franchisors use the annual renewal process to review their franchise programs and make modifications to the FDD, franchise agreement, and other exhibits.
Failure to timely update the FDD will result in its expiration, at which point it can no longer be used. When this happens, franchisors are generally precluded from engaging in the sales process. This is known as “going dark.”
Material Changes to the FDD
In addition to the annual update, franchisors must update their FDDs when there is a material change to the information disclosed in the FDD.
What constitutes a material change varies by state, but is generally a fact, circumstance, or condition that would have a substantial likelihood of influencing the franchisee’s conduct or decisions. Materiality is determined from the point of view of the franchisee. Examples of a material change may include a change in the franchisor’s ownership, a lawsuit against the franchisor for fraud or a change in franchise fees charged by the franchisor. However, other circumstances may also be considered material. Franchisors should consult their NY franchise lawyers about whether a change is material and requires an update to the FDD.
Where Is The Updated FDD Filed?
As discussed in prior Insights installments, there is no federal franchise filing requirement. However, there are a number of states that require franchisors to file their FDD with the state before offering or selling franchises that will: (i) be operated in that state or (ii) that will be operated by individuals domiciled in that state. Similarly, updated FDDs will need to be filed in each “registration state” where the franchisor intends to sell franchises in the coming year. Your franchise lawyer can file on your behalf, but communication is key because state requirements and annual franchise filing deadlines vary.
What Else Should I Know?
We have also detailed how the annual FDD renewal process may be time-consuming and complex. Once your fiscal year has ended, you will want to speak with your auditor (and connect them with your lawyer) as soon as possible. This will help to ensure that the audit is completed promptly so that you can timely complete the renewal process.
Read more about our FDD experience and services here.
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