Annual Franchise Renewals

If you are a franchisor, you are (or need to be) aware that it is, for most franchise systems, franchise renewal season. It is that time of the year when you are required to update your FDD with any material changes and to include a new audit for 2012. It is important to note that for most franchise systems, if you do not update your FDD you will be unable to offer or sell franchises after April 30, 2013, and as early as March 31, 2013 in some registration states.

This post is meant to give some helpful tips on preparing for this hectic time of the year.

·         Order your audit early –as in today. In reality, we recommend that your audit be ordered no later than January 31, 2013. This is because audits can take time and you will not have a completely updated FDD without an audit.

·         Between now and early February, sit down with your sales team and/or those overseeing the franchise system to discuss what material changes you would like or need to make to the FDD and franchise agreement. This can be anything from a change in royalties to how training is conducted. If you have found that you are continuously waiving a “requirement” with each new franchisee, you will want to talk to your franchise attorney about whether or not that should be a material change. A good place to start is with your Items 5, 6 and 7 and make sure that all the amounts stated are still true and accurate.

·         Take time to accurately fill out Item 20. This is often left to the last minute, but the 5 required tables are important and should accurately reflect the status of the franchise system.

·         Review any ancillary agreements you require your franchisees to sign. According to the FTC Amended Rule, “franchisors are required to attach a copy of all proposed agreements relating to the franchise offering that the franchisor provides or for which the franchisor makes arrangements.” This can include a required lease agreement form, ADA Certification, Personal Guarantees, Confidentiality Agreements, ACH Agreements, and many others. You will want to discuss with your franchise attorney all the agreements you require or provide for your franchisees to determine if they are required to be included in the FDD.

The renewal process can be long and arduous. But if you follow the above tips and take the time early on, the process can be smoother and you will be able to offer and sell without any delay.

Several registration states offer guides and tips in helping you through the annual renewal process.

The California Department of Corporations 
The State of Indiana
The State of Virginia (franchise forms)

Franchise Registration Process

Initial Registration

For new and existing franchise systems, registration states can create a headache if the registration process is not handled correctly. The process can be time consuming and expensive, especially if not handled correctly the first time.

There are 14 registration states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. The initial registration fees vary from $125 to $750. In each of these 14 states, a franchisor must not only comply with the FTC Disclosure Rule, but must also comply with the individual state rules which often impose additional disclosures and restrictions on the franchisor. Simply put, if you are interested in taking your franchise system into one of the above 14 states, you are restricted from offering or selling to either an individual residing in that state, or to an outside individual looking to franchise within that state.

As a baseline, all franchisors must comply with the FTC Disclosure Rule and have appropriate and compliant documents before offering or selling a franchise. From there, a franchisor can add state-specific addenda or create a state-specific FDD for registration purposes.

Depending on the registration state, registration is either immediate (meaning once the state receives the FDD packet and required documentation, the franchisor can begin to offer and sell in that state) or the registration will take time, after an examiner has reviewed all the provided documents to make sure they are compliant with state law. Often a state examiner will provide the franchisor with a list of issues that need to be addressed and corrected (a “Comment Letter”) before the state can register the franchise for offers and sales.

Renewal

Once a franchise is registered in a state, that registration is generally effective for a one-year period, after which the franchise must be renewed, for a fee, in that state in order for the franchisor to continue to offer or sell there. However, not all registration states count this “year” in the same way. Some states have an expiration one year from the date of registration. Other states have an expiration date of 90-120 days from the end of the franchisor’s fiscal year end. Your registration letter will provide the date of expiration. You should calendar this date and be aware that it might be sooner than expected.

Renewal is also required in all non-registration states. The difference is that once the disclosure documents have been updated (including an updated audit) then the franchisor can generally begin offering and selling franchises in non-registration states. (The one caveat here is that if the state is a business opportunity state, you must make sure you file the appropriate exemption before selling in that state.)

Exemptions from Registration

Both the FTC and Registration States provide limited exemptions to registration. These vary from state to state. In most instances, the exemption only removes the registration requirement, not the disclosure requirement. You will still need to have accurate and up to date documents, and to comply with the timelines for disclosure.

If you are looking at taking your franchise system into a registration state, you should speak with a knowledgeable franchise attorney to ensure compliance with state-specific laws and regulations.