Maintaining a Current FDD will Protect Your Franchise System
As a franchisor one of your most critical "legal and business" obligations relates to ensuring that your FDD remains current an up to date. Why? Because if your FDD is not current as to its disclosures and‚ if applicable‚ state based registration then you will be exposing your franchise system to unnecessary franchisee claims and exposure. Even if you do nothing wrong‚ if your FDD is not current you could be tainting your franchise sales process and exposing your business to frivolous franchisee claims.
So consider the following points:
- Your FDD must be updated and your registrations renewed no less frequently than on an annual basis - within 120 days of your fiscal year-end;
- Your FDD must be updated earlier than on an annual basis - no less frequently than quarterly - if there are material changes to the disclosures contained in the FDD;
- If your FDD includes Item 19 financial performance representations then changes must be made immediately.
What Types of Changes Matter?
Consider anything that could be claimed as material to a franchisees investment decision which‚ quite frankly‚ relates to each FDD disclosure item with financial performance representations taking on the most urgency. When determining if a quarterly update is needed‚ some factors or questions to consider‚ include:
- Has there been a change in the Franchisor's management team;
- Has a management team member filed a bankruptcy petition;
- Has the data related to your Item 19 representations been proven to be unreliable;
- Are you changing the financial obligations imposed on franchisees; and
- Are you changing the legal obligations set forth in the franchise agreement.
There are many factors to consider and as a franchisor you should know and be aware of these events. They will not be difficult to identify. However‚ you must be and remain proactive in ensuring that your FDD is updates. Otherwise...you may be subjecting your franchise system to unnecessary headaches and legal issues.