The COVID-19 Impact: Filing a Disclosure of Financial Performance Representations

As the U.S. economy felt the significant impact of COVID-19 beginning in March of 2020, businesses around the Country have scrambled to alter operating standards to survive government mandated business closures and new health and safety guidance. The future of the pandemic’s impact on the business community is unknown, and many are struggling to weather the storm of what may be the “new norm.” The franchise community was no exception to the hurdles presented by COVID-19, and it seems the industry is far from being out of the weeds.

On top of fluctuating safety guidance at the local, state, and federal levels, lack of liquidity, and the looming threat of COVID-exposure liability, many franchise brands are still assessing the potential impact of COVID-19 on their systems. One unanswered question presented by the current pandemic business climate is whether franchisors can make historical financial performance representations (FPRs) in 2020 based on characteristics from the fiscal year of 2019 and predating any impact from the COVID-19 pandemic.

The Federal Trade Commission’s (FTC) Franchise Rule and applicable state franchise laws require franchisors to update their franchise disclosure documents (FDDs), which most recently occurred in the spring of 2020. Many of those FDDs included information from the franchisor’s last fiscal year end, which, in most cases, was December 31, 2019, and included in the “Item 19” an FPR based on franchisee or company-owned unit data that occurred before COVID impacted the franchise. In considering the significant financial impact COVID-19 has had (and will continue to have) on the franchise business model, many state franchise administrators and franchisors are seeking guidance on what actions must be taken moving forward to ensure that information provided in an FPR meets the requirements of federal and state franchise laws.

Recognizing this issue, the North American Securities Administrators Association (NASAA) Franchise and Business Opportunity Project Group, has released two resources to aid franchisors in preparing and filing an FDD while accounting for COVID-19 implications on the franchise business model. One resource is NASAA’s guidance on Disclosing Financial Performance Representations in the Time of COVID-19. This document discusses many considerations and obligations franchisors should take into account when filing and updating FDDs, including discussion on material changes to FPRs. The second resource published by NASAA is the Franchise Disclosure Handbook - A Resource Guide for Preparing a Franchise Disclosure Document. This handbook may serve as a convenient resource, compilating key preexisting materials, commentary, and other guidance from the FTC and NASAA regarding franchise disclosure and is meant to aid in the preparation of a quality FDD.

While franchise brands must shift current practices to survive the pandemic, it is imperative they use all available resources to remain informed on best practices and operating procedures. IFA invites you to check out NASAA’s resources and to also register and join the IFA’s Franchise Law Virtual Summit, where NASAA regulators will join one of many panels to discuss the current COVID-19 climate and its implications on franchise regulatory compliance. This event is scheduled for August 12-13th.