Sep 25, 2020

    Franchise Operations

   Keith Gerson

Update Your FDD: 5 Critical Things to Get Right in the Age of COVID

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Many franchises look dramatically different today than six months ago. Gyms and retail stores are operating with limited hours or reduced capacity. Restaurants have likely altered their business models around reduced occupancy, takeout, curbside pickup and delivery. Due to these shifts and their financial and legal impacts on your business, it’s critical that you update your franchise disclosure document (FDD) to accurately reflect these changes, even if you believe changes won’t be permanent.  

Since the Federal Trade Commission (FTC) requires that your FDD is updated and accurate in order to protect those interested in buying a U.S. franchise as part of the pre-sale due diligence process, any changes brought on by COVID need to be reflected in your document in order to be in compliance. Failing to do so could hamper a potential franchisee in making an informed decision about whether or not to make an investment in the business — and ultimately be very costly to you. You also become susceptible to the consequences of failing to meet your FTC legal requirements for disclosure.

While franchisors are required to update their FDDs annually, this year in particular has presented unexpected challenges due to the coronavirus pandemic. In addition to government-required closures, franchises have had to contend with declining sales, supply chain disruptions, and deferrals or discontinuations of royalty payments. In your FDD, you are required convey the current state of the business in an honest and transparent way, while still allowing prospective franchisees to look toward a hopeful future.

If COVID-19 has impacted your brand in a material way — as it has for many franchises — it is critical to update your franchise disclosure document. While every franchise has encountered different obstacles over the past few months, here are five areas of your FDD to pay particular attention to in light of COVID-19-related challenges.

Key Franchise Disclosure Document Items for Review

Item 19: Financial Performance Representations

While a franchisor is not required to provide information on financial performance, it is a critical way to establish transparency and build trust with potential franchisees. Before moving forward with any updates, however, first consult with your legal team to determine how you will handle this section. These updates will be held under high scrutiny by states, as well as potential franchisees and their legal teams.

In general, franchisors should update item 19 so a prospective franchisee understands how the franchise performed during the pandemic. It should describe any significant changes to the business model that could impede consumer sales (e.g., restaurants may have limited indoor seating in response to state and local executive orders), as well as other circumstances resulting from the pandemic (e.g., employee furloughs, location closures).

Alternatively, you may decide to include a comparison between the first half of 2019 and the first half of 2020. This can allow your business development team the opportunity to have in-depth discussions with potential franchisees about how the business performed before and during the pandemic.

Item 20: Outlets and Franchisee Information

In item 20, you must list contact information for all current franchisees, as well as the franchisees that have left in the past year. Based on performance and retention during the coronavirus pandemic, this list may now need to be revised.

This particular update should serve as an important reminder to connect with your current franchisees to let them know what to expect if potential franchisees contact them with questions. While the past several months may have been a trying time, all franchisees will benefit from the overall growth of the franchise system — so current franchisees should strive to provide accurate, helpful information to potential franchisees.

Item 6: Other Recurring Fees or Payments

While item 5 outlines the initial fees that franchisees must pay to establish the franchise, item 6 describes all other recurring fees or payments that must be made. This could include royalties, marketing fees, and development fees.

If you have made any changes to these fees based on COVID-19, it must be reflected in your FDD. If, for example, you deferred or waived royalty payments for a period of time to assist with cash flow, you must update the FDD accordingly. This not only provides accurate disclosure, but can also demonstrate how your franchise supports franchisees during difficult times.

Item 12: Territory

This section describes any exclusive territory and whether territories will be modified. During the coronavirus pandemic, some franchises may have had to enhance or change restrictions on territorial activity. Restaurants, for example, may have had to add or change delivery services based on local mandates. Any territorial changes will need to be reported in your updated FDD.  

Item 11: Franchisor's Assistance, Advertising, Computer Systems, and Training

In the wake of the coronavirus pandemic, it’s likely that your standard training processes have changed. One common change, for example, is that many franchises now offer virtual rather than on-site training. That shift may have also impacted the amount of time you dedicate to different training items, such as the company’s culture and values, which can be more difficult to communicate through videos and video calls.  

Because things like training can seem very minor compared to financial disclosures, the details of item 11 can be easy to take lightly. But transparency about all the details, even those that seem minor, is critical. Be sure this item outlines exactly where and how you now conduct training, as well as how much time you dedicate to each training topic.

Your franchise disclosure document is an opportunity to build trust, establish transparency, and grow your business — even in these uncertain times. To learn more about required changes to your FDD and how to better leverage that document following COVID-19, view our recorded webinar, What Franchisors Must and Must NOT Do With FDDs Now. 

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