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Franchisees: Seek Updated Franchise Agreements & Remain Informed

Each year the Federal Trade Commission requires franchisors to finalize any updates to their Franchise Disclosure Document, which means prospective franchise partners have access to an updated version of the FDD after the end of the franchisor’s fiscal year.  This requirement means franchisors must provide updated FDDs no later than 120 days from the end of their fiscal year period so that franchisees researching the system can get a fresh perspective on what’s ahead for the new fiscal year.

Though the responsibility remains with the franchisor to implement FDD changes and furnish updates to franchisees, there are a number of specific obligations franchisors have in relation to FDD updating, as well as good practice actions that potential franchisees can take to protect themselves during preliminary research.  Potential franchisees can consider the following:

Timing is Everything

Individuals researching the franchise industry for the right opportunity to move into must consider when their research is occurring in terms of FDD update obligations.  The ideal time to seek out the most up to date FDD is during that post-120 day period when franchisors are required by the FTC to create and distribute up to date information based on present fiscal information.  Access to accurate information when considering franchise investments is vital and positioning due diligence research around these guidelines can make researching easier for all parties involved.

Though changes in terms of the financial standing (called Material Changes, perhaps involving bankruptcy or legal battles, among other situations) of a franchise system must be disclosed by franchisors on a quarterly basis during any given fiscal year, franchisees do well to consider the precise fiscal year dates of the specific franchise systems they are researching and the timeline of their research vs. update requirements.  Considering disclosure and updating requirements before research intensifies is a wise choice to at the very least enhance all aspects of remaining informed as much as possible.

Franchisee Update Requests Honored

For the most part, potential franchise partners are able to request up to date information before making any lasting commitments.  This means that franchisors are still obligated, when reasonable requests are made by potential franchisees, to furnish the latest FDD and any quarterly updates, despite the fact that a current FDD has already been furnished and a receipt document signed by the franchisee.  This typically applies to situations where a more up to date version of the FDD is anticipated to become available and the potential franchisee wishes to acquire the latest version before signing an agreement.  Such updates are typically furnished at some stage before signing, though there is no strict timeline in place for this, even after a receipt document is signed.

Franchisees that opt to wait to sign agreements with a franchisor until the most up to date FDD is furnished may do so, waiting days, weeks, or even months.  This strategy, as a means to remain as informed as possible and with good reason, can pay off in the long run if the latest FDD discloses unsavory information that protects the franchisee from having made a poor investment decision.  Likewise, at times an updated FDD may disclose new criteria or fees or disadvantages that the previous FDD did not contain, which makes holding out a gamble for some investors.  Franchisees must consider first and foremost how aligned with and interested they are in the franchisor’s business model and concept, with attempts to remain informed prioritized based on the situation and the viability of the situation.

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