Franchise Law: State Of The States

Prepare for Your 2010 Renewals

The franchise registration states require an updating of your FDD annually. This requirement necessitates the filing of a renewal application (including the revised FDD, current audited financial statements, and supplemental documents) with each registration state in which you plan to continue selling franchises.

Some states (Maryland, Michigan, North Dakota, Virginia, Washington, and Wisconsin) grant a franchise registration for a one-year period. Therefore, the renewal applications must be filed prior to the end of that one-year period if you are to continue your registration. Other states (California, Hawaii, Illinois, Minnesota, New York, Rhode Island, and South Dakota) require a renewal application (some states call it an "Annual Report") to be filed within a certain number of days after the end of your fiscal year (generally 120 days; California is 89 days). For example, if the franchisor was approved in New York in July 2009 (using 2008 audited financial statements plus unaudited interim statements), the franchisor must refile no later than April 30, 2010, to maintain its registration.

Further, the FTC Rule mandates that your disclosure document be updated within 120 days of your fiscal year-end. For example, if a franchisor has a December 31 year-end, they must update their documents by April 30.

Even though the FTC gives you 120 days in which to update your FDD, a number of the registration states require that you include financial statements that are current within 90 days of the filing. As a result, we strongly recommend that, whenever possible, renewal applications should be filed with all states at the same time and within 90 days following the end of the franchisor's fiscal year. Coordinating the filings in this manner is most cost-efficient and will enhance the likelihood of being able to use a single multi-state FDD rather than having state-specific FDDs.

The renewal application or annual report requires a general updating of the information contained in the FDD, including the audited financial statements. (More on audited financial statements in the paragraph below.) Certain items in the FDD (Items 5, 7, 8, 11, 19 if you make a financial performance representation, 20, and 21) must be updated as part of the renewal. The key is to work on those updates well in advance of your proposed renewal filing dates. For example, updates to the Item 20 charts can take more time than anticipated in large, mature systems.

If you make an Item 19 financial performance representation, you need to look at your 2009 unit results (at times a sobering view) and determine how to address this in your 2010 FDD. This also is the appropriate time to consider other changes and roll them into the renewals. In that regard, each franchisor should carefully review its Item 7 initial investment estimates and other similar disclosures that may have been affected by an uneven 2009 in many franchise systems. In addition to the required revisions, since most franchisors are continually modifying their franchise program, the FDD and franchise agreement must be revised to reflect any changes. In that regard, it is wise for franchisors to track program changes for purposes of filing the annual renewal application.

Many of the renewal registration changes can wait until after the completion of a franchisor's fiscal year-end. The one change that cannot wait is the audited financial statements. Each franchisor must consider how its year-end audited financial statements will look prior to year-end. For example, if you need to make changes to your balance sheet to eliminate any negative net worth requirement (thus potentially avoiding several of the registration states imposing financial assurance requirements), appropriate planning and action must occur prior to year-end. After that it is too late.

One final note. With proper planning and coordination, each franchisor can proactively manage the renewal process. Proactive management minimizes the impact of losing potential deals because of delays in the renewal and registration process. Do not blame the examiners. Do not blame the lawyers. Just do it.

Good luck.

This article is provided for general informational purposes only and should not be considered or construed as legal advice or opinion concerning any specific circumstances or facts. You are encouraged to consult with your own franchise lawyer regarding any specific issue, situation or legal question you may have.

Brian Schnell is a leader of the Faegre & Benson Franchise Team, which represents more than 200 franchisors in 35 states and 7 countries. He is a past chair of the IFA Supplier Forum; a member of its Legal/Legislative, Awards, and Membership committees; and in 2009 became the first male to receive the IFA Women's Franchise Committee Crystal Compass. Contact him at 612-766-7472 or bschnell@faegre.com.