1. Accurate record keeping is critical
Keeping an accurate account of both the current FDD and exhibits used or referenced in the FDD is critical in terms of legal compliance and risk mitigation.
- Once your current FDD is approved, take action to ensure that you are not mistakenly using your old FDD. However, be sure to archive each version of the FDD used.
- All persons receiving a FDD must sign an acknowledgment of receipt. Every person receiving an FDD must sign and date a receipt acknowledging receipt of the FDD. Your receipt should specifically reference the FDD version received, the state the FDD is applicable to and the date of receipt. You should carefully file and retain all signed receipts for later retrieval.
- Keep your FDD current and only use the most current version. The FDD needs to be properly updated every year. Generally, updating must occur 90 to 120 days after your fiscal year end. Updated FDD’s must be filed in the registration states each year.
2. Education is important
Educate all employees and representatives about the dos and don’ts when selling franchise opportunities. A lack of familiarity with the laws of a particular state may result in fines, penalties or other impositions.
- Follow the rules, including the 14 Day Rule. In general, you can talk to a prospective franchisee by phone without sending a FDD first. You cannot take any money or accept a signed commitment until at least 14 days after the prospect has received the current FDD for that state.
- You must send the completed Franchise Agreement and Area Development Agreement to the purchaser at least seven calendar days prior to final execution. This “cooling off” period can run concurrently with the 14 Day Rule if you coordinate properly. Because the FDD is intended only as a reference tool, you must use a new and separate Franchise Agreement for each franchise being sold for signatures. If you need to change or negotiate some terms, consult with counsel as some states regulate changes to the approved FDD and changes without proper approval may have serious adverse consequences.
3. A bad sale is worse than no sale at all
Do not make earnings claims of financial performance guaranties. Do not make oral statements about the sales or profits of any company or franchise operations, past or future. We recommend that all performance representations be in writing and contained in the FDD.
- Special deals and one-off’s may create unforeseen risks. Promote uniformity by using a uniform FDD in every state. Changes or amendments to your FDD must be in writing and handled in accordance with applicable state and federal law. Memorialize deals or changes in written amendments instead of making changes in the franchise agreement itself to avoid internal confusion.
4. Be careful before advertising a franchise opportunity for sale
- Franchise advertising and brochures often must be approved. Advertising the sale of franchise opportunities often must be filed with certain state agencies and at least three business days before being used. Advertisements may include any promotional brochures, videos, handouts, or other materials used in the sale of the franchise.
5. Not every default is the same
- States may have strict regulations governing franchise terminations. Always contact counsel before sending a default or termination notice.
6. Protect your value
- Carefully watch names used by current and former franchisees. Protecting one of your most valuable assets, the intrinsic value of your unique trade name, is critical to the success of your franchise system. Your failure to establish and enforce rules relating to the use of your name, logo, marks, or trade-dress could be catastrophic to your franchise system.