If you’re a franchisor, keeping your Franchise Disclosure Document (FDD) up to date is a must if you want to satisfy the Federal Trade Commission (FTC) and state franchise laws. The FDD is a key legal document that provides prospective franchisees with an honest view of a franchise’s operations, financials, and overall health. Keeping your FDD accurate and timely is good because it benefits everyone and avoids unnecessary legal trouble. So what are these updates, and when are they required?
When Does the FTC Require Updates to an FDD?
Working with a franchise business attorney can help ease this process, especially if it involves state-specific nuances or additional requirements. With an experienced attorney, you can be sure your franchise complies, isn’t exposed to potential liability, and maintains a reputation of transparency.
According to the FTC’s Franchise Rule, franchisors must update the FDD at least once a year. The document must contain the most current information about the franchise and be completed within 120 days of the franchisor’s fiscal year-end. Let’s say a franchisor’s fiscal year ends December 31. Then, it must submit an updated FDD by April 30 of the following year. This annual update needs to include the most up-to-date financial data, accurate descriptions of fees, and any recent legal disclosures.
FDD Update Requirements
The FTC requires franchisors to review and update several FDD components annually to ensure accuracy and compliance. Key areas typically updated include:
- Financial Statements: Financial data must reflect the most recent fiscal year. A franchise’s audited financial statements demonstrate its financial health and credibility.
- Litigation History: Any legal proceedings against the franchisor, its affiliates, or their management must be disclosed. This gives prospective franchisees a gauge of the franchisor’s stability and trustworthiness.
- Franchise Fees and Expenses: The updated FDD must include any changes in fees, including initial franchise fees, royalty fees, or marketing contributions.
- Earnings Claims: These are optional but must be current and supported by data if supplied. By making the earnings transparent, franchisees can assess how much they’ll earn.
Material Change Updates to Your FDD
In addition to annual updates, the FDD must be revised whenever a franchisee undergoes a ‘material change.’ Material changes include any significant event or information likely to affect a franchisee’s investment decision. This might involve:
- Operational Changes: Changes in the franchise’s business model, operational standards, or training programs.
- Fee Adjustments: This must be disclosed if you’ve raised franchise or royalty fees.
- Leadership Changes: Any major leadership or management structure change must be documented.
- Litigation Involving Franchisor or Key Personnel: New lawsuits or other legal problems that damage the franchise’s integrity or financial health.
Ideally, these changes should be disclosed within 60 days of their occurrence. This will help you communicate regularly with your franchise business attorney to identify and disclose these changes as early as possible to reduce the risk of misrepresentation.
What Types of Updates Must Be Made to an FDD?
Your FDD update should include many primary areas to meet federal and state franchise regulations. Here’s a breakdown of the main updates required:
- Franchise Fees: An updated FDD should specify any changes in initial fees, royalty percentages, marketing contributions, or other recurring fees. Franchise owners should know what they’ll pay during their franchise ownership.
- Territorial Rights and Restrictions: The franchisor must disclose if policies about exclusive territories, such as size, boundaries, or exceptions, change. These rights provide franchisees with information to assess their market competition and customer base potential.
- Investment Requirements: If you’re following a fixed budget, the initial investment range and any updates to estimated costs for setup, equipment, inventory, or training should be accurate. This will help franchisees better plan their financial needs.
- Intellectual Property Updates: The FDD should also reflect any changes in trademarks, copyrights, patents, or new IP rights granted or retracted.
Accurately updating these details builds your franchise’s credibility and helps prospective franchisees be informed so they trust you.
What are the consequences of not updating an FDD?
An old FDD can have serious legal consequences. If franchisees don’t have accurate and timely information, they may unknowingly invest under misrepresented terms. This can result in franchisee lawsuits, state fines, and, in some cases, bans on state franchise sales. In addition, compliance problems can hurt a franchisor’s reputation, franchisee retention, and future growth.
Offers and Sales Without an Updated FDD
If you sell a franchise without updating the FDD, you directly violate FTC regulations. In states with franchise registration laws, such as California and Illinois, franchisees are even more strictly regulated, as franchisors can incur fines and be restricted in sales if they do not maintain current documents.
Renewing Franchise Agreements
If franchisors are renewing agreements, they must give franchisees an updated FDD when renewing any fee changes, operating changes, or territory changes. If the franchisee does not provide an updated document at renewal, they will not have an up-to-date document of the franchise terms at renewal, which could cause disputes and legal complications.
Financial Audits Without a Valid FDD
Financial audits without an updated FDD can uncover discrepancies that destroy your franchise’s credibility. An outdated FDD may not accurately reflect an accurate revenue or legal obligation, which can damage the franchise’s reputation and scare away future franchisees.
The FTC regulation requires you to update your FDD annually. It is important to keep your FDD updated to show that you are transparent and that you do business fairly. FDD updates help maintain trust in the franchise system and are a sure way to protect both franchisors and franchisees. The update process is simplified by working with a knowledgeable franchise business attorney who can help you avoid the pitfalls of noncompliance.
