Checklist for Franchisors: Updating Your FDD

Franchise Development

In the business world, the new year is a time for setting new budgets and objectives. It is also a time to review and update your current operations.

By Charles S. Modell, CFE

With the turning of the calendar to 2017, franchisors that are starting a new fiscal year will soon be updating their franchise disclosure documents. At best, the process can be tedious, and at worst, it can be daunting for those caught unprepared. However, by getting ahead of the project, and starting early, this can be an opportunity to make improvements in your operations, and help facilitate franchise sales in the new year. The checklist below should be kept on your desk as a “to do” list over the next month. 

Know your franchise registration deadlines.

Federal law requires that your disclosure document be updated within 120 days after your fiscal year end. State laws vary. In most registration states, your registration is valid until 90 or 120 days after your fiscal year end. However, some states tie your renewal date to the anniversary of your last renewal. Note any early dates so that you are prepared to file early in those states, or to stop selling franchises until your registration has been renewed.

Contact your accountants now.

One of the primary reasons franchisors miss their renewal deadlines is that they do not timely obtain their audited financial statements. Make your auditors aware today of your filing deadline. Better yet, set a date at least one week ahead of your filing deadline for the day you want to see a draft of your audit. That will give you time to review the audit and correct any errors, without delaying your filing. Be sure to also get from your attorney the form of consent the auditors must give you to submit with your filings and provide it to the auditors. While some of the large accounting firms prefer using their own consent letter, more of the states are requiring the standard form be submitted without change.

Talk to your operations people.

Do they have changes they are considering making over the next year? If they do, consider how those changes will affect your disclosures and your franchise agreement. If you can time these changes to the date of your renewal, you will be less likely to find that you have renewed your franchise registrations, only to then need to amend them. Along the same lines, have any of the provisions of your franchise agreement been called into question during the year? Now is the time to clarify anything that anyone suggested was ambiguous.

Talk to your franchise salespeople about changes they want to make.

Your salespeople hear objections to provisions of the franchise agreement, and to operational requirements. Find out what you can about the objections. If you believe that changes can be made to address those objections, without adversely affecting your business, your lawyers should be creative enough to accommodate the salespeople without compromising your ability to protect the system.

Update your manuals.

Most franchisors elect to include a copy of the table of contents of their manuals in their disclosure document. When was the last time you updated your manuals? Have your policies been revised to reflect changes in the business during the year? If you added pages during the year, did you update the table of contents? This is a good time to look at your manuals, be certain they are up to date, and update the tables of contents before they are needed for filing.

Begin working on the Item 20 tables.

Item 20 of your disclosure document contains a number of charts addressing changes in the franchise system in the last year. Tracking these changes in large systems can be time consuming, particularly when records are not complete. The sooner you start on those charts, the better the memory of the people who worked with franchisees that left the system in the last year. Since these charts need only be current through the end of your fiscal year, there is no reason not to start on them in early January and have them be the first section you complete in the new disclosure document, rather than the last.

Update Item 19.

More than half of franchisors today provide sales and/or profit information to prospective franchisees in Item 19 of their disclosure documents. If you do not do so, you may be putting your salespeople at a competitive disadvantage. If you do provide that information, is it the information your prospects are requesting? If not, the law gives you a great deal of discretion in the information you provide, and you should consider additional information that would help prospective franchisees decide to join your system. The North American Securities Administrators Association is expected to adopt a new commentary on financial performance representations later in 2017. It will have the force of law starting in the latter part of 2017, but drafts are available now and will give new guidance on preparing financial performance representations that will withstand judicial scrutiny.

Review your franchise advertising.

Several states require that all franchise advertisements be filed with state franchise examiners a week or so before they are used. While these filings can be made at any time during the year, you will already be filing your disclosure documents with these states in the spring, so save yourself some delays and costs by updating the franchise advertising at the same time you file your renewal applications. 

Review your insurance coverage.

We live in a regulatory climate where consumers, franchisee employees, courts, and various state and federal agencies have sought to hold franchisors responsible for the actions of their franchisees. While the law in this area will likely continue evolving over the next few years, talk to your insurance agent about coverage available to protect you against joint employer claims and claims of vicarious liability for the actions of your franchisees. Look for gaps in your insurance coverage and make sure your coverage limits are still adequate based on the size of your business. Most franchise agreements also require that franchisees name the franchisor as an additional insured. This is a common, but often ignored provision in franchise agreements. If you have such a provision, request copies of insurance certificates from your franchisees and follow-up to make certain you obtain them, and that other insurance requirements of your franchise agreement are being followed.

The new year is a time for resolutions and new beginnings and, in the business world, a time for setting new budgets and objectives. It is also a time to review and update your current operations. The fact that you must update your franchise documents each year gives you an opportune time to review those documents, and your procedures, to assure they are consistent with your goals and objectives. The foregoing checklist should help you do so. 

Chuck Modell, CFE, is a shareholder at Larkin Hoffman Daly & Lindgren in Minneapolis and has represented franchisors for nearly 40 years.