Annual FDD Updates and Material Changes

Preparing a Franchise Disclosure Document (FDD) and registering or filing a franchise offering as
required in some states are not one-time events. The FDD must be updated annually. In addition, federal and state franchise filing laws require franchisors to amend their FDD if there has been a material event or material change. An experienced franchise attorney can help ensure ongoing compliance with legal requirements to avoid liability and lost franchise opportunities.

Under federal law and most state franchise laws, the FDD must be updated annually within 120 days after the franchisor’s fiscal year end. The updating process requires franchisors to consider any changes they want to make. Many franchisors use this period to review their franchise programs and make modifications to the FDD, franchise agreement and other exhibits.

Some states require franchisors to register their FDD or file a notice with the state. Typically, those states also require franchisors to renew and update their registration or filing at least annually. However, state requirements and annual franchise filing deadlines vary. Depending on the state(s) in which the franchisor operates and/or sells franchises, the annual renewal filings must be made within 90 to 120 days following the end of the fiscal year or prior to the anniversary of the effective date of the franchise registration.

The annual renewal process may be time-consuming and complex. Franchisors may be required to provide audited financial statements as well as other information as part of the renewal application.

In addition to annual FDD updates, franchisors must amend their disclosure document if there is a material change to the information. The amended FDD will also have to be filed in any registration states.

What constitutes a material change varies by state, but generally, it is 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 lawsuit against the franchisor for fraud, loan default or a change in the franchisor’s ownership. However, other circumstances may also be considered material. Franchisors should consult an attorney about whether a change is material and requires an update.

Under federal law, the franchisor must update the FDD with any material changes within a reasonable time following the end of each calendar quarter. However, states may have a different period. Generally, franchisors should provide the amended FDD to prospects who received the old document but did not purchase the franchise prior to the event requiring the amendment and then wait the required waiting period before closing the sale. If the material change relates to the financial performance representations made in Item 19, the franchisor must immediately notify prospective franchisees of the material change.

If a material event has occurred and the franchisor is in the process of updating or registering the FDD, best practice is to speak to an attorney before taking further steps to close sales in the pipeline.

Updating the FDD and annual state franchise filings should be undertaken with the help of an attorney. Franchisors and their advisors must track the various state and federal effective and expiration dates to ensure deadlines are not missed and all materials are provided.

Contact Lusthaus Law to discuss your franchise needs.