Franchise Law & Administration

Does a franchisor have a duty to disclose what is not statutorily required (or statutorily permitted) to be disclosed?

2011-01-21T17:40:00.005-05:00

A 2010 case muddied the waters on whether a franchisor has a duty to disclose information that is not required (or even permitted) to be in its franchise disclosure document. In the case of Colorado Coffee Bean, LLC, et al. v. Peaberry Coffee Inc., et al., the Court analyzed:

• Whether a franchisor had a duty to disclose non-required material information.
• Whether the prospective franchisees could reasonably rely on the absence of any disclosure to assume that no bad information existed.
• Whether exculpatory clauses in the disclosure document (disclaimer clauses in Item 19), the integration clause in the franchise agreement and the acknowledgements in the franchise agreement precluded the prospective franchisees from relying on the nondisclosure.

The franchisees brought claims of fraudulent nondisclosure, negligent misrepresentation, alter ego and violation of the Colorado Consumer Protection Act. The franchisees also brought the additional claim of aiding and abetting fraudulent nondisclosure against the law firm that prepared the franchisor’s disclosure document (then a UFOC).

The franchisees alleged that the franchisor failed to disclose:

• that most of its company owned and operated stores were operating at a loss; and
• that its parent company had been operating at a loss for several years.

The franchisees did not allege that they had been provided with false information. They alleged that there was material information, other than what they were told, and other than what was required to be disclosed in the UFOC, that the franchisor should have disclosed to them. The franchisor did disclose the gross sales of all if its company owned stores in Item 19, but not any additional information on cost of goods sold or operating expenses of its stores.

The franchisor claimed it did not have a duty to disclose either the profitability of the company owned stores or the profitability of its parent company, either under the FTC Franchise Rule or otherwise. The franchisor also felt that is was not liable under the franchisees’ claims because its parent company’s operating losses were the result of its rapid growth, some of its company owned stores were profitable, and its retail sales had increased in the years immediately before it implemented its franchising program, all of which rendered the nondisclosure immaterial.

Company Owned Stores

With regard to the failure to disclose the profitability of the company owned stores, the Court found that even though the franchisor actively concealed material financial facts, the franchisees could not rely on the lack of disclosure to bring a claim against the franchisor. The Court based its logic on two reasons. First, the Court found that the exculpatory clauses (disclaimers) in Item 19 and the integration clauses, acknowledgements and disclaimers in the franchise agreement and related documents that the franchisees signed were adequate to preclude the franchisees from inferring that the company owned stores were profitable. Second, the Court found that there was adequate publicly available information from which the franchisees could determine the profitability of a store.

Item 19 of the UFOC contained disclosures that are commonly found when a franchisor includes an earnings claim (now called a financial performance representation). The Court found that these disclaimers were adequate to preclude a claim of reliance and that the franchisees could therefore not rely on the absence of additional information to infer that any additional information would not be material. Also, in signing the franchise agreement, the franchisees agreed to several acknowledgements, disclaimers, statements of non-reliance and integration provisions. Simultaneously with the signing of the franchise agreement, the franchisees also signed a Closing Acknowledgement that contained acknowledgements and disclaimers similar to those in the franchise agreement.

In addition to the Item 19 disclaimers, several of the franchisees testified that they had used the Item 19 gross sales and “publicly available store expense information” to prepare a “break even revenue point” of the company owned stores. The franchisees then used this information to prepare pro forma analyses to determine profitability at different levels of revenue to determine the revenues that they needed to achieve in order to obtain certain returns on their investments. The Court then found that because there was adequate publicly available information from which a determination of the profitability of the company owned stores could be made, the franchisees could not have relied justifiability on the franchisor’s failure to provide this information.

The franchisor therefore won this round.

Parent Company Profitability

On the claims for failure to disclose the profitability of the parent company, the Court reached a different conclusion. The Court found that the exculpatory clauses were not adequate to preclude a franchisee’s reasonable reliance on the nondisclosure of information on the parent company’s operating history. The exculpatory clauses addressed a franchisee’s non-reliance on any affirmative representations that might be made outside of the UFOC and franchise agreement, but did not address a failure to disclose material information. The Court pointed out that none of the exculpatory clauses addressed non-reliance on undisclosed but material information. Since the exculpatory clauses were not specific enough to cover the failure to disclose material information about the parent company’s profitability, the Court found that the franchisees’ reasonable reliance claim on the nondisclosure was sufficient to move forward.

The franchisees won this round. At least temporarily.

Complying With the FTC Franchise Rule Was Not Dispositive

The Court did not spend a lot of time in reaching the conclusion that fully complying with the FTC Franchise Rule requirements would not insulate the franchisor from liability for claims of nondisclosure of material information. In reaching this conclusion, the Court cited the FTC Franchise Rule statement that the requirements did not “preclude franchisors . . . from giving other nondeceptive information orally, visually, or in separate literature so long as such information is not contradictory to the information in the disclosure document.” The Court further cited the Federal Regulations which provide that the disclosures do not “create a safe harbor for franchisors engaging in otherwise unlawful conduct.”

Conclusion

The old saying “If you can’t say something nice, don’t saying nothing at all,” may satisfy the golden rule, but may not be the best policy to avoid legal liability. . . or does the double negative save you?

Federal Restaurant Labeling Requirements

2010-09-20T11:23:00.003-04:00

The Patient Protection and Affordable Care Act is a federal statute that was signed into law on March 23, 2010. Along with the Health Care and Education Reconciliation Act of 2010 (signed into law on March 30, 2010), the Act is the product of the health care reform agenda.

One provision of this Act requires restaurants or similar food establishments that are part of a chain with 20 or more locations (regardless of the ownership of the 20 locations) to disclose, with certain exceptions, nutritional information. The new law requires covered restaurants to display the number of calories contained in standard menu items on the menu listing the item for sale and on menu boards (including drive-thru). This information also must be available in a written form on the premises and the menu listings must indicate that this information is available on premise. Restaurants also must display a succinct statement concerning suggested daily caloric intake, as specified by the Secretary of Health and Human Services by regulation, to enable the public to understand the significance of the provided nutrition information.

Covered restaurants will have to comply with the Act’s labeling provisions when the Food and Drug Administration completes its implementing regulations. The FDA’s proposed regulations must be published by March 20, 2011. The Act required these provisions to be fully implemented by January 1, 2014.

North Carolina Bill Would Amend Business Opportunity Act to Include Franchises

2010-09-07T12:19:00.000-04:00

North Carolina has a pending bill, called the North Carolina Franchisee and Business Opportunity Purchasers Protection Act, that would require franchisors to comply with the FTC Franchise Rule.

If passed, franchisors will have to file 2 copies of the required disclosure document with the North Carolina Secretary of State. One of the remedies afforded to franchisees under the bill is the right to void the agreement (in addition to seeking damages) in cases involving untrue or misleading statements, disclosure violations, or other noncompliance. The bill provides for certain exemptions that mirror those in the FTC Franchise Rule and for large franchisors.

A franchisor will have to establish either a surety bond or trust account if the franchisor makes any of the following representations in the pre-sale process: (1) that the prospective franchisee will derive income from the franchise that exceeds the price paid for the franchise; or (2) that the franchisor will refund all or part of the price paid for the franchise, or repurchase any of the products, equipment, supplies or chattels supplied by the franchisor if the franchisee is unsatisfied and pays to the seller an initial, required consideration that exceeds $200. This last provision is troublesome for franchisors that offer to refund some or all of the initial franchise fee if the franchisee fails the initial training program or is unable to locate a suitable site in a timely manner.

House Bill 2036 passed its first reading and was referred to the Committee on Commerce, Small Business, and Entrepreneurship on May 26, 2010.

North Carolina Bill Pending Would Add Reporting Requirement For Franchisors

2010-09-07T11:52:00.002-04:00

North Carolina has a bill pending that would require franchisors to report certain information about their North Carolina franchisees, similar to the law that was enacted in New York last year. Under the bill, a covered taxpayer would have to file an annual report by May 1 of each year. The annual report would have to include: the gross sale of each franchise located in North Carolina (as each franchisee reported to the franchisor), the total amount of sale by the franchisor to the franchisee itemized by franchisee, and the income of each franchise located in North Carolina (as each franchisee reported to the franchisor).

As written, the bill is vague on the covered franchisors, referring to them only as “taxpayers,” without any further clarification. Therefore it is unclear on whether a franchisor that does not have to file tax returns in North Carolina would be considered a “taxpayer,” although the drafters of the bill probably intended to include all franchisors that have franchises in North Carolina.

House Bill 2001 passed its first reading and was referred to the Committee on Commerce, Small Business, and Entrepreneurship on May 26, 2010.

New Jersey Expands Franchise Practices Act

2010-09-07T11:13:00.001-04:00

New Jersey amended its Franchise Practices Act by expanding the definition of "place of business." This change was effective immediately on signing on January 16, 2010.

The new definition of “place of business” is: a fixed geographical location at which the franchisee displays for sale and sells the franchisor's goods or offers for sale and sells the franchisor's services. Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle, except that with respect to persons who do not make a majority of their sales directly to consumers, "place of business" means a fixed geographical location at which the franchisee displays for sale and sells the franchisor's goods or offers for sale and sells the franchisor's services, or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor's goods are delivered to customers.

This expanded definition now includes wholesale distribution businesses that deliver their products to their customers, rather than having the customers come to the distributor’s place of business.

Virginia Clarifies Requirement for Current Financial Statements In FDD

2010-09-07T10:52:00.001-04:00

Virginia made a change to the Regulations under its Retail Franchising Act, effective July 1, 2010. The new requirement is that the audited financial statements must be current within 120 days of the date of filing for initial or renewal franchise registrations. If the audited financial statements are not current within this time period, the franchisor must include in its FDD the franchisor’s unaudited financial statements that are current within 120 days. The unaudited financial statements must be prepared in accordance with generally accepted accounting practices.

Since many states already have this requirement, the Virginia change should not present any new problems for franchisors desiring to register or renew a registration in Virginia. You simply must remember to include the unaudited statements in your FDD if your audited financial statements are dated more than 120 days before the date you file your initial or renewal registration.

Maryland Revises Statute To Change Delivery Timing Requirements

2010-08-30T10:55:00.002-04:00

Maryland is one of only 5 states that still adhere to the old standards for delivery of the FDD to a prospective franchisee, requiring that the FDD be delivered at the earlier of the first personal meeting held to discuss the franchise sale or at least 10 business days before the prospective franchisee signs a binding agreement with, or makes a payment to, the franchisor or the franchisor’s affiliate in connection with the proposed franchise sale.

A new change in the Maryland statute will revise the delivery requirements to coincide with the requirements under the revised FTC Franchise Rule. After October 1, 2010 in Maryland, the FDD must be delivered at the earlier of: (a) 14 calendar days before the prospective franchisee signs any binding agreement with the franchisor or pays any consideration that relates to the franchise relationship; or (b) a prospective franchisee’s reasonable request to receive a copy of the FDD. This change makes the Maryland requirements substantially similar to the requirements under the FTC Franchise Rule.

Currently, most franchisors include a separate disclosure in their FDDs’ Receipt page that identifies the different delivery requirements under Maryland law. By October 1, 2010, every franchisor that provides this additional Maryland disclosure should revise its Receipt page to delete the reference to the old Maryland delivery requirements.

Maryland has issued an Interpretive Opinion that provides that this change, in the absence of other material changes, will not require an amendment filing to any current Maryland registration. The Interpretive Opinion also provides that Maryland will not pursue any action against a franchisor that begins to comply with the changed requirements before the October 1, 2010 implementation date. However, this position will not change the statutory right of action that a prospective franchisee may have, so the safest course of action is to begin complying with the new requirement on October 1, 2010, rather than before.

Manitoba will be the next Canadian province to enact franchise legislation

2010-06-08T12:45:00.003-04:00

A new franchise disclosure act has been introduced in Manitoba, which if passed will make Manitoba the 5th Canadian Province to enact franchise disclosure legislation. Bill 15, The Franchises Act was introduced into the legislature in April 2010. The new Act is modeled after the Uniform Law Conference of Canada’s (ULCC) model franchise legislation and is similar to Ontario’s franchise disclosure law, the Arthur Wishart Act.

Some of the provisions of the Manitoba law include:

A substantially complete disclosure document satisfies the disclosure document delivery requirements, even if there is a technical irregularity or mistake not affecting the substance of the document.
The Manitoba law will not apply to contractual agreements for the purchase of a reasonable amount of goods or services at reasonable wholesale prices. This provides relief to distribution systems who would be subject to this legislation due solely to the payment element of the definition of a franchise.
Franchisors will be able to use deposits, site selection and confidentiality agreements during the 14 day disclosure period. However, for confidentiality agreements, the franchisor will not be able to prohibit the prospective franchisee from disclosing information to a franchisee organization or to individual franchisees of the franchisor’s system.
After its deletion from the ULCC model legislation, the sophisticated franchisee exemption that is contained in The Wishart Act is not included in the Manitoba law. This exemption only applies if the franchisee’s investment is more than $5,000,000 and therefore may not be a heavily used exemption.

If the Manitoba law is passed, Manitoba will join Ontario, Alberta, Prince Edward Island and New Brunswick as the Canadian provinces with franchise legislation.

UK High Court Determines That Franchisors Owe A Duty Of Care To Franchisees

2010-05-18T10:54:00.001-04:00

The recent English High Court decision in MCB Printing and Design Limited v. Kall Kwik UK Limited [2010] EWHC 624 (QB) establishes that a franchisor owes a duty of care to its franchisees and future franchisees.

In this case, the franchisee made 2 claims, 1 for negligent advice on build-out costs and 1 for failing to complete required assistance to get the franchisee up and running.

The first, a “premises claim”, focused on allegedly negligent advice that the franchisor gave on the cost of refitting the premises to the franchisor’s mandatory requirements. The actual costs were more than double the franchisor’s original assessment. The judge found the advice to be negligent, as the estimate was provided without consulting the franchisor’s own preferred supplier whose estimate later proved more accurate.

The second claim was a marketing claim based on the franchisor’s failure to provide the level and quality of marketing advice and support agreed by the parties. The judge found that the franchisor breached the franchise agreement by failing to complete installation of necessary technology that would have helped the franchisee manage its grand opening marketing campaign and by failing to provide the franchisee with advice, know-how and guidance in such areas as management, finance, marketing and methods of operation.

The court held that the franchisor’s inadequate assessment of refitting costs was a breach of its duty of care to the franchisee even though the franchisee had not yet signed a franchise agreement and become its franchisee.

This decision establishes that in the United Kingdom, a franchisor owes some duty of care to franchisees and even potential franchisees.

For United States franchisors that sell franchises in the United Kingdom, this case reinforces our conservative approach that offering initial investment costs, such as we offer in the United States, is risky business in the absence of a thorough knowledge of the U.K. market.

Proposed Changes To Virginia Franchise Law

2010-04-06T21:21:00.006-04:00

The Virginia Division of Securities and Retail Franchising has submitted to the Virginia State Corporation Commission proposed revisions to the rules and regulations under the Virginia Retail Franchising Act. The proposed revisions would require the financial statements that are included as an exhibit to the FDD be current within 120 days of filing the initial or renewal application. If the required audited financial statements are dated more than 120 days before the filing date, the FDD must contain an unaudited balance sheet as of a date that is within the 120 days and an unaudited statement of income or operations covering the time from the date of the audited financial statements and the date of the unaudited balance sheet. Any unaudited financial statements must be prepared in accordance with generally accepted accounting standards.

The proposal recommends an effective date of July 1, 2010 for the new regulations.

The proposed revisions may be viewed in full at http://www.scc.virginia.gov/case under Case No. SEC-2010-00021.

New York Tax Law - New Information

2009-08-20T11:04:00.005-04:00

The New York State Department of Taxation and Finance has made some changes to its new reporting requirements for franchisors.

First, the NYSDTF has implemented an extension procedure for franchisors that are unable to meet the deadline. The extension must be filed before the due date (first due date is September 20, 2009) and once filed, is automatic. The extension is for 90 days.

Next, the NYSDTF has waived some of the information that it previously required, including audited gross sales of a franchise if the franchisor has audited and found gross sales to be different from what the franchisee reported and the amount of sales that a designated supplier has made to a franchisee.

The NYSDTF also has made changes to reporting requirements if the royalties are not paid as a percentage of gross sales.

Finally, the NYSDTF will waive penalties in some situations, when the information filed is incorrect because the franchisee supplied incorrect information to the franchisor without the franchisor's knowledge.

New York Tax Law Update!

2009-08-06T21:10:00.000-04:00

The IFA has received a response from the New York State Department of Taxation and Finance to its July 20 letter.

Reporting Deadlines: The Department is creating an automatic 90-day extension process for the initial as well as all future reporting deadlines. Prior to the initial deadline (set by the Legislature for September 20) the Department will post on its website instructions to request an automatic 90-day extension to December 20, 2009. All future annual deadlines, which were to be due March 20, will be given similar treatment, meaning that if a franchisor requests the extension all annual reports will be due June 20. Permanently moving these deadlines, rather than creating an extension process, would have required an act of the New York State Legislature.

Forms: In the coming days, the Department will post on its website the standardized form franchisors must use to report the required information.

Supplier Sales: The Department has dropped the requirement that franchisors report to the state sales made by “designated” or approved suppliers to New York franchisees. However, sales of supplies from a franchisor or its affiliates directly to a New York franchisee must still be reported.

Franchisee Gross Sales: If the franchisee currently reports gross sales to the franchisor, this information must be supplied to the state in the required reports. If a different performance measure is used (such as room-nights in lodging or cents-per-gallon of product in food service) that calculation must be explained and, where possible, the quantitative data for the relevant reporting period supplied to the state.

Franchisee Identifying Information: The requirement that franchisors report to the state the name, address and New York certificate of authority or federal tax identification number of the franchise remains in effect.

New York State Tax Law

2009-07-22T17:35:00.003-04:00

New York state has become the first state to pass a law that requires franchisors to provide detailed information on their franchisees and their franchisees’ operations to the state, so that the state can compare the submitted information to the tax returns that the franchisees file with the state. Complying with this new law can be quite burdensome and many franchisors do not even collect some of the information that must be submitted to the state of New York.

Who Must File?

The New York law applies to every franchisor that has at least one franchise in New York state that is required to be registered as a sales tax vendor. The law does not require that the franchisor itself be physically present in New York and applies even if the franchisor does not conduct any business in New York, other than having New York franchises.

The actual franchisees have no reporting responsibility under this new law, however, each reporting franchisor should let its franchisees know that it will be providing information on its New York franchises in its annual report.

What Must Be Reported?

The information that franchisors must report on their New York franchises includes:

· Each franchisee’s legal name
· Each franchisee’s phone number
· Each franchisee’s d/b/a name, if different from its legal name
· The owners’ names of each franchisee (e.g., principal shareholder, LLC member)
· Each franchisee’s Federal Employer Identification number (for an individual franchisee, this will be each franchisee’s social security number)
· Each franchisee’s New York Sales Tax Certificate of Authority number
· The beginning date of each franchisee’s unit
· Each franchise unit’s physical address
· Each franchise unit’s mailing address, if different
· Each franchisee’s gross sales, as reported under each franchise agreement
· Any discrepancies between each franchisee’s reported gross sales and gross sales of any audit that the franchisor conducted
· If known, the amount of New York state and local sales tax that each franchisee collected at each franchised unit
· The amount of royalty payments each franchisee paid to its franchisor
· The percentage of royalty that each franchisee pays to its franchisor
· The amount of sales the franchisor or its affiliates made to each franchisee
· The amount of sales each of the franchisor’s designated suppliers made to each franchisee

As you can see, the information required is quite extensive. Many franchisors will have to amend the manner in which they capture data on each New York franchise, as they may not currently be gathering all of the required information.

When Are Reports Due?

The first report under this new law is due September 20, 2009 and must contain information from March 1, 2009 to August 31, 2009. After that, franchisors must file by March 20 of each year, and each report must contain information from the end of the previous report to February 28 of that year.

Franchisees Must Be Notified

By March 20 of each year, the franchisor must provide each New York franchisee with a statement that includes all of the information that the franchisor submitted as part of its report. The statement may be in summary form, as long as certain of the required information is included. Each franchisor should send this statement to its franchisees in such a manner as to be able to verify that each statement was sent in a proper and timely manner.

Where Do You File?

Franchisors must file their information return electronically with the New York State Department of Taxation and Finance. To file a return and for additional information go to the Tax Department’s Web site: http://www.nystax.gov/sbc/thirdpty.htm. Information on how to file will be available at this link after September 1, 2009.

What Happens If You Don’t File?

Violations of the law can result in a penalty of $500 for 10 or fewer failures and up to $50 for each additional failure. If a franchisor fails to timely file an information return under the new law, additional penalties of not less than $500 but up to $2000, will apply to each failure. The total penalties assessed for each reporting period may not exceed $10,000.

Illinois Franchise Reform Bill Passes General Assembly

2009-06-11T14:48:00.001-04:00

TO: Legislative Action Group
Legal Legislative Committee
Corporate Counsel Committee

FR: Troy Flanagan
Director, Government Relations

DT: June 2, 2009

RE: Illinois Franchise Reform Bill Passes General Assembly

Following efforts by the Illinois State Bar Association, the Illinois Retail Merchants Association and the IFA, legislation making needed changes to state franchise regulation was passed by the Illinois General Assembly on May 29. S.B. 1285, by Sen. Linda Holmes and Rep. Michael Zalewski, must be presented to Gov. Pat Quinn within 30 days, and he then has 60 days to take action.

S.B. 1285 accomplishes the following: conforms the renewal period to be 120-days after the franchisor's fiscal year-end; conforms the material change amendment time period to the FTC requirements of quarterly and within 30-days after the close of the quarter; requires disclosure documents to be prepared in accordance with the amended FTC Franchise Rule and the North American Securities Administrators Association Guidelines instead of the Uniform Franchise Offering Circular Guidelines; reduces the complications for large franchisors who have done business with Illinois (experienced franchisors); and gives the Illinois Attorney General a new remedy entitled "Assurance of Voluntary Compliance" for violations of the Illinois Franchise Disclosure Act.

IFA will continue to work with in-state allies to advocate approval of this measure by Gov. Quinn. Please contact me if you have any questions.

M. Troy Flanagan
Director, Government Relations
International Franchise Association
1501 K Street, NW, Suite 350
Washington, DC 20005
Direct 202.662.0792
Fax 202.628.0812
Cell 202.285.4371
tflanagan@franchise.org
www.franchise.org

Forms Available

2009-04-27T19:37:00.002-04:00

I have several forms that I am willing to share with clients and future clients :-) Send me an email to get any of the following (I can't figure out how to post an attachment to my blog :-))

United States map showing registration states
Franchise registration renewal due dates
Franchise registration renewal effective dates
Franchise registration expiration dates
Filing Fees - Initial Filings
Filing Fees - Renewals
Filing Fees - Amendments

Also, if there are any client education materials that you would like to see, please let me know.

Thanks,

Item 20

2009-03-08T09:28:00.001-04:00

Item 20 always is the most challenging item to update. No matter how careful you are, the numbers never reconcile the first time you review them. Here is a list of the reconciliations that I perform to make sure that everything matches.

Table 1 – Double-check the math to make sure everything adds up correctly. This really should be left to the end, because the numbers may change based on what the other tables reveal.

Table 2 – Make sure the numbers in the table match the list of franchisees that have transferred. When you pull the transfer list, make sure that you include the state in which the store was located, not just the state where the former franchisee now lives. Otherwise, the state numbers will be off. For the list of former franchisees, I break the list into 3 categories: transferred stores, terminated stores that were open, and terminated franchise agreements for stores that never opened. By breaking these lists out, it is much easier to reconcile the numbers in the tables.

Table 3 – I start by double-checking the math, to make sure everything adds up correctly. I then compare the ending state totals to the list of current franchisees, to make sure that the numbers match the list. On the first time through, the numbers generally will not match and you will need to go back to reconcile the discrepancies and find the mistakes. For the list of current franchisees, I break this list into 2 categories: currently open stores and franchise agreements signed but store not yet open. This makes it easier to identify where the discrepancies in the table come from.

Table 4 – I also start here by double-checking the math, to make sure everything adds up correctly. I then compare the ending state totals to the list of company owned stores, to make sure that the numbers match the list. Note that this list is pulled only for reconciliation purposes, it does not go in the FDD.

Table 5 – For the franchise agreement signed but store not yet open, I reconcile the numbers against the list that will be included with the current franchisee list. For the other 2 columns, I obtain the information needed from the business people in charge of these areas. These 2 columns are projections of what is expected this fiscal year, so estimates are needed rather than absolute precision.

Your Item 20 will generally take more time to complete than most other areas of the FDD, so once everything matches, the hardest part is done! Good luck reconciling!

Sending BLBQs, SDFs, and the FDD

2009-03-01T19:16:00.001-05:00

I have spent the last few weeks studying for the Georgia one day attorneys exam, and therefore have neglected my blog. Yup, after 18 years of admission in Maryland, Georgia still wants me to take an exam. Now that the bar exam is over, and hopefully won’t have to be repeated :-), I can return to my regularly scheduled programming.

I will pick up where I left off, but a little behind schedule on the FDD updating process. Once each year, I circulate the Background/Litigation/Bankruptcy Questionnaire (“BLBQ”) to each person listed in Item 2, to make sure that no information has changed. I have each person review their questionnaire and sign and date if all information remains true. For any new person in Item 2, the BLBQ should have been sent out as soon as they were hired, so even they should have one to review.

I maintain my BLBQ form as a pdf form, so that I can email the blank form to each new hire that will be listed in Item 2. The new hire can then either type his or her responses in the form, before printing and then giving it back to me, or he or she can print the form and handwrite the requested information. When I receive a BLBQ from a new Item 2 person, I type the responses into the form and save it for use next year. In this manner, the Item 2 person does not have to provide the same information over and over again in later years. I simply email that person’s form to them already completed, so only changed information need be provided. The business people appreciate this time saving measure.

I also use the same process for the Seller Disclosure Form. In addition to circulating the Seller Disclosure Forms, I request that each salesperson also review and sign off on any form of policy that the company applies to the salespeople, such as an earnings claim policy or policy restricting investments in franchisees. This reinforces the company’s commitment to these policies.

Finally, I also circulate the disclosure portion of the FDD to each Item 2 person, requesting that each person review the FDD to determine if any information has changed. I generally allow 2 to 3 weeks to get comments back to me.

Next week, I’ll tackle the challenges of Item 20!

Make Your Mechanical Changes to Your FDD

2009-01-19T19:06:00.009-05:00

While you are waiting for your business people to gather the information that you have requested, you can move forward with making some of the changes to your FDD. The first items I change are the effective date throughout the FDD, the footer (which I use to designate the brand, date and version of the FDD and whether it is the paper or electronic version) and the state effective dates, which I delete alltogether. For the information that I am waiting on from the business people, I add an @ symbol in the body of the FDD where the information goes. In this manner, I know that my FDD is not completely updated until a computer search of the document reveals no @ symbols. This makes it almost impossible to miss an item that requires updating.

Next I review the Item 2 bios to remove all items that are more than 5 years old, review Item 3 for closed litigation that is more than 10 years old and also review Item 4 for any bankruptcies that are no longer disclosable. In Item 21, I udpate the description of the financial statements and delete any unaudited financial statements that were previously included.

Finally, I delete all the exhibits that I know will be replaced and mark the location with the @ symbol, such as the list of current and list of former franchisees and the audited financial statements.

Next week, we will comple our due diligence and follow-up on requested information that has not yet been received. This is when the real tooth pulling begins!

Time to Request Information From the Business People

2009-01-19T19:00:00.003-05:00

At year end, you should have pulled together the reports that you will need for your system statistics, so this week it’s time to alert the relevant business people about all of the additional information that will need to be updated in the FDD. I find it helpful to cut and paste the relevant portion of the FDD into the email in which I request the information. This helps the business people understand the context for the information. When I request this information, I focus on the following areas:

Item 1 – update on system statistics for affiliated franchise programs
Item 2 – update on comings and goings in the managerial ranks
Item 3 – update on pending litigation, particularly challenging to obtain from predecessors
Item 4 – update on pending bankruptcies
Item 5 - range of initial franchise fee during last year
Item 7 – update on initial investment costs
Item 8 – update on revenues from restricted purchases – this is difficult to obtain while the accounting group is trying to close out their year and work with the auditors (they experience work compression must like we do)
Item 11 – update on the outline for the training program
Item 11 – update on the use of the advertising funds (again challenging while the accounting group is trying to close out their year)
Item 11 – revised Table of Contents for the Operations Manual
Item 19 – updated financial performance representation information
Item 20 – updates for all 5 tables and a list of current and list of former franchisees

I follow-up on these requests on a weekly basis, to make sure that my requests remain high on the priority list.

Next week we will move on to making changes in the actual document. As always, if you would like an Excel spreadsheet that identifies each action item, send me an email request.

Time to Establish Your FDD Update Plan

2009-01-09T09:08:00.002-05:00

Now that the holidays are behind us for another year, it’s time to hit the ground running for updating your FDD, if you have a December 31 fiscal year end. This is the time to establish your plan and timeline for updating the FDD, leaving plenty of time to prepare your state filings. I generally plan each step in the process, but the general categories to consider include circulating the FDD for comment, sending the Background/Litigation/Bankruptcy Questionnaires to the Item 2 people, sending the Salesperson Disclosure Form to your franchise salespeople, requesting specific information for the FDD (such as revenues from restricted purchases, financial performance representation data, Item 20 charts and lists, etc.), incorporating all comments and circulating a redlined FDD for final comments, incorporating new audited financial statements and obtaining the auditor’s consent, and creating the final clean and redline of the FDD for filing with the states. In the coming weeks, I will identify the more specific action items that must be addressed. If you would like an Excel spreadsheet that identifies each action item, send me an email request. Until next week, happy updating!

FDD Updating - Initial Thoughts

2008-12-19T17:55:00.004-05:00

Franchise registration renewal season is almost on us as most franchisors have a December 31 fiscal year end. In preparation for gathering the information that you will need to update your FDD, please keep the following tips in mind:

Make sure that your auditors are aware of the filing deadline for your registrations, so that they can plan their audit to be completed and their opinion issued well before this date.
Most auditors are now requiring that they complete a review of your FDD before they will issue their auditor's consent. Plan your FDD update timeline to allow at least a week for the auditors to review the final FDD.
If your database system is real time, plan to run all the reports that you will need to complete your Item 20 tables on January 1 or 2, before you change the numbers. In this manner, it is easier to reconcile your numbers without having to also work backward from the date you begin preparing your tables.

That's all the tips for this week. I will keep adding tips each week as the FDD update season gets into full swing in January.

First Attempt

2008-12-12T15:19:00.000-05:00

Ok, it appears that I now am going to attempt to join the world of bloggers. Since I pride myself in my computer skills, I have no excuse not to embrace this new (relatively new in the world of technology) tool. I intend to use this blog to post on topics related to franchise law and to franchise administration, including current events and practical advise. I will try to post at least once per week, so check back weekly. Let me know if there are particular topics that you would like for me to address.

Thanks,