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Franchisor Guide

How to Update Your Franchise Disclosure Document

03-05-2021 by Sarah Petersen
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When you start franchising your business, you have to create a franchise disclosure document (FDD) to show to any potential franchisees. After the FDD is initially drawn up, you can’t just forget about it. 

 

The Federal Trade Commission requires you to update it at least once a year to remain in compliance. There are also things called “material changes” that you would have to update even more frequently. You’ll need to focus on a few things to make sure you’re staying in compliance.

The Yearly FDD Update

According to Federal law, your FDD has to be updated within 120 days of the end of your fiscal calendar year. You’ll need to double-check your state laws, as well, to make sure there aren’t some different guidelines that will need to be followed.

 

While you do have about a quarter of the year to update that document, getting ahead of the game can save you a headache down the road. Collecting all of the data for everything you’ll want to include in the update could take some time.

Item 19

This is the one that could take the most time to prepare. Item 19 is the section on financial performance. Get in touch with your accountants and anyone else who may need to be involved early on. You don’t want to miss your deadline because you waited too long to start getting your financial documents in order.

 

Now, Item 19 is not required to be filled out, but it’s a great way to start building trust with your potential franchisees. If you do choose to include this information, make sure your legal team is involved. This information will be under intense scrutiny not only from those potential franchisees but also from your state government.

 

With the impact the COVID-19 pandemic had on many industries in 2020, this could be an especially important issue to detail in your FDD. Potential investors will want to know how your business withstood the economic downturn. Talk thoroughly with your legal team and business development team to decide the best way to go about this and how you will demonstrate your performance to potential franchisees.

Item 20

With this item, you’ll be updating the contact information for all of your current franchisees. That will include any new franchises that were awarded in the previous year. 

 

While you’re updating the list, it’s a good idea to touch base with those current franchisees to let them know they may be hearing from potential new franchisees who have questions about the business. Ensure they have the most up-to-date and accurate information that’s available. Growing the franchise will benefit everyone in the system, so you don’t want old information to cause you to lose a potential business partner.

 

 

A franchisor consults an attorney to update their FDD.

 

Other Items to Double-Check

There are a few more items to possibly revisit, especially given changes that may have been made during the height of the pandemic. 

 

Item 6 addresses other recurring fees or payments franchisees may need to pay. That would include royalties, development fees, marketing fees, or anything else in that same vein. If you enacted any special programs during the pandemic, such as waving royalty fees or decreasing marketing fees, make sure you’re updating that in your FDD as well.

 

Any changes to the way you divide territories will be in Item 12. Did the pandemic lead you to adjust territory operations because of new delivery services, for example? Any of those adjustments must also be reported. It’s all about giving potential franchisees the total picture of what they’re buying into.

 

Lastly, Item 11 deals with your assistance, advertising, computer systems, and training processes. This one can be easy to miss. You might not think about it much, but any changes, even minor ones, to your training practices or the way that you provide assistance to franchisees has to be updated. 

 

When you think about everything in the FDD, this may seem minor. Dealing with things as serious as the financial health of the company tend to make this item less of a priority, but it’s equally as important. These days, you may be carrying out more aspects of the business virtually. Details like that could make or break the decision for some of your franchisee prospects to buy in.

Material Changes and When to Make Updates

The yearly update isn’t the only thing you have to worry about. There are also “material changes” that have to be reported every quarter. These changes include:

 

  • Adding or removing upper-level personnel in the franchise system to Item 2
  • Any lawsuit (s) filed against people listed in Item 2, the franchisor, or developments to lawsuits already listed in Item 3
  • Changes to unit development costs or capital requirements
  • Any franchise unit closures
  • Events that change the financial performance listed in Item 19
  • Negative changes to the franchisor’s financial statements

 

Again, these material changes must be reported at the end of your fiscal quarter. 

 

There is one important exception to the rule, though. Anything that impacts Item 19, which is the financial performance representations, has to be reported immediately. 

Get Help Staying in Compliance

Keeping your FDD in compliance with FTC laws is one of the biggest ongoing tasks you’ll have to keep up with as a franchisor. It’s how prospective franchisees can get a deeper understanding of your business and how it operates. Think of it as the first step to building a healthy business relationship with your franchisees. 

 

Such an important and in-depth task shouldn’t be handled on your own. Having a franchise attorney is a must. Your attorney will be able to ensure you’re staying in line with both state and federal laws as you continue to grow your business.

 

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