In my over three decades of experience as a franchise consultant, I am often asked, “When and how do you update your Franchise Disclosure Document (FDD)?” Here, I will examine the laws that pertain to updating a Franchisor’s FDD.
When you begin to franchise your business, you are building a new company. You must decide many issues that are the foundation of your franchise program. The first step when you franchise your business is to develop a FDD, as required by the Federal Trade Commission (FTC) Rule on Franchising.
The Federal laws (the FTC Rule on Franchising) require all Franchisors to prepare a Franchise Disclosure Document (FDD) and a Standard Franchise Agreement when you franchise your business. These documents must be drafted in a very precise manner.
There are 23 separate Items that must be addressed in the FDD.
The FDD must be given to the potential Franchisee at least fourteen calendar days before the franchise prospect is eligible to sign the Franchise Agreement or pay to the Franchisor any monies relating to the purchase of the Franchise.
The franchise laws require that when you franchise your business, the FDD is updated once a year or sooner if a “material” event occurs in the Franchisor company. Some of the material changes may involve the following:
- Creation of one or more new companies that will have dealings with the Franchisees in real estate, purchasing inventory or supplies, etc.
- Addition of new personnel to the Franchisor or the elimination of key personnel that are listed in the current FDD.
- The naming of the franchise company and/or any of its Officers, Directors or other key members of the management team listed in the FDD in certain types of litigation and/or the filing of bankruptcies.
- Change in the Initial Franchise Fee.
- Change in the Royalty or Service Fee, Brand Fund, or Local Marketing Expenditures.
- Significant changes in the Initial Investment Chart (e.g. leasehold improvement costs).
- Changes in the required purchasing arrangements with vendors.
- Changes in the trademarks or service marks.
- Changes in the Pre-Opening or Post-Opening services provided by the Franchisor.
- Changes in the required Computer System.
- Creation of Financial Performance Representations, if not in the current FDD.
When you franchise your business, the FTC Rule on Franchising requires a yearly update with corporate financial statements for the most current year. If a material event occurs during the year, then the FDD must be revised as soon as practical (typically 30 to 45 days after the event causing the revision).
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