Updating the FDD – What, When & Why

February 2, 2024by Brian Walsh

As a franchisor it is crucial to keep your FDD (Franchise Disclosure Document) properly updated. Not doing so could expose your franchise network to unnecessary legal issues from franchisees, the FTC, and any states you are registered in, including Florida.

If your FDD expires, it is invalid and can no longer be used. All franchise sales activities must be stopped; that means no closings, no prospecting, and no advertising, or marketing. And, for the most part, you won’t be able to renew franchise agreements with existing franchisees or complete transfers.

Consequently, allowing your FDD to expire will have both legal and financial repercussions.

When does the FTC Require Updates to an FDD?

Federal franchise laws state that a franchise disclosure document expires 120 days after the end of the fiscal year. This date will vary depending on which fiscal year your franchise uses. For instance, if you use the calendar year as your fiscal year, your FDD must be renewed before April 30th to remain compliant with FTC regulations.

Additionally, federal law requires an FDD to be updated whenever a material change occurs. A material change, per FTC guidance, means any variation from the current FDD terms that is likely to impact the conduct or decisions of a current or potential franchisee. Examples of changes that could be considered material include the following:

  • Legal action was taken against the business
  • Changes in the financial health or performance of the franchise, such as a bankruptcy petition
  • Changes in C-level or upper-management positions
  • Legislative changes that could impact business operations or procedures
  • Substantial increases or decreases in the fee schedule or initial investment required of franchisees

In addition to the federal requirements, many states have their own laws that impact how or when an FDD must be updated.

Florida’s FDD Update Requirements

Your FDD expires one year after its effective date in Florida. With that being said, federal law supersedes state law. So, if your required renewal date in Florida falls later than the federal date, you must still renew your FDD by the date required by the FTC. If you have different dates for renewing your franchise’s disclosure document, you may be able to request that Florida adjust your registration date to more closely align with the 120-day FTC requirement.

Material Change Updates to Your FDD

Florida does not require quarterly or ongoing updates, but the FTC material change requirement means that your amended FDD must also be filed in registration states. Again, a material change is any change that could affect your franchisee or prospective franchisee’s actions or decisions relating to the franchise.

There are certain scenarios that could impact other legal requirements or in which special action should be taken. Any time an FDD is updated during a prospect’s review period, the updated document must be provided to that prospect, and the 14-day review period[1] should reset to give them ample time to look over the updated FDD. Additionally, if there has been a material change in financial performance, potential franchisees must be notified immediately.

If a material change has occurred, franchisors must amend their FDD within a reasonable period of time after the close of each quarter.

What Types of Updates Must be Made to an FDD?

Periodic and annual updates may seem like a hassle for franchisors, but these requirements also protect the franchisor from a variety of risks, including unnecessary franchisee claims, stunted franchise growth, and reputational harm. Keeping your FDD current and compliant is important for every franchise.

So, how do you know what types of updates are relevant and require changes to an FDD? Consulting with an attorney is always a good idea, but having a general understanding of the requirements is a great starting point. Below is a brief overview of the factors you may want to be aware of when updating your FDD:

  • Your FDD needs to be updated and your registrations must be renewed at least once per year.
  • Material changes require at least quarterly updates to your FDD.
  • FDDs with Financial Performance Representations require immediate changes and notification to franchisees.

The material change requirement is most often the area that causes the most confusion and challenges. The concept of materiality is somewhat subjective, so determining whether a change falls into the category is difficult. It may be helpful to consider the following questions if you think a material change may have occurred:

  • Has your management or C-level team changed?
  • Has a bankruptcy petition been filed?
  • Has your Item 19 (Financial Performance Representations) information changed?
  • Are you making adjustments to any franchisee financial obligations?

This list is not exhaustive. There are countless changes that could occur that would constitute a material change. Perhaps the most important question to consider is this:

  • Would the change impact a reasonable prospective franchisee’s decision-making process?

If the information is likely to affect how your prospect views or approaches this business opportunity, you should probably disclose the change and update your FDD.

What are the Consequences for not Updating an FDD?

For new and growing franchises, a valid and current FDD is a major part of the business. Potential franchisees look for this document as part of their consideration and evaluation process. Focusing on the importance of providing this disclosure document to franchise prospects may distract from the importance this document plays even when new franchisees are not coming on board. Even if a franchisor is not selling any new franchise businesses, the legal requirements for updating an FDD still exist.

Your FDD must be updated 120 days after the end of your franchise’s fiscal year to stay in compliance with FTC guidelines and one year after the document’s effective date to comply with Florida law. Failing to update your FDD means that it is no longer valid, and you open your business up to numerous risks and consequences.

Offers and Sales Without an Updated FDD

An expired or outdated FDD means you cannot make any franchise offers. The risk of inadvertently violating FTC regulations is high because even answering queries or having a franchise website can qualify as a violation. Additionally, if there is a prospective franchisee you’d like to do business with during the time your FDD has expired, you risk losing that opportunity if a deal must be postponed for you to update and register as required.

Renewing Franchise Agreements

Letting your FDD run out compromises more than just new business prospects. With only a few exceptions, franchise renewals are also restricted if you do not have a valid franchise disclosure document. Without the opportunity to renew, some franchisees may choose to take their business elsewhere rather than wait for you to become compliant with federal and state laws.

Financial Audits Without a Valid FDD

Choosing not to update your FDD does not preclude you from financial audits. The FTC requires three years of financial statements, so even the period of time in which your FDD was not updated will need to be included when you do decide to update and renew.

Using an expired FDD to conduct business opens a franchisor up to numerous detrimental scenarios and unnecessary risks. Ensuring compliance with federal and state regulations is the best way to avoid any unwanted consequences stemming from an out-of-date FDD.

Five Tips for Updating Your FDD

The myriad of state and federal laws can be confusing, and the process of updating such an important and extensive legal document can be overwhelming and time-consuming. However, as complex and challenging as it may be, updating your FDD is just as important. The below tips can provide some general guidance and clarity as you prepare to update your disclosure document.

1. Familiarize Yourself with State and Federal Guidelines.

The FTC requires an update and renewal within 120 days of the end of your fiscal year. And, because Florida is a registration state, you will have an additional deadline to track – one year from the effective date of your current FDD. These exact dates will vary depending on what fiscal year system your franchise uses and what date your FDD went into effect.

For example, if you use a fiscal calendar year, April 30th is the FTC deadline for updating. In addition, if your FDD became effective in Florida on October 1st, you must also provide an updated FDD to the state by September 30th.

2. Regularly Track Your FDD Changes and Issues.

Whenever you notice an issue with your current FDD, make a note of the relevant Items and potential alternatives or revisions to include in an updated FDD. If any changes are needed that don’t require immediate adjustments, include them in a running list of necessary adjustments. The changes you include could be made in the annual update or quarterly, depending on the nature of the change. Consider including things like typos, questions, corrections, and other issues in this list.

3. Don’t Wait to Get Started on the Update.

Despite the lengthy process of updating an FDD, many franchisors wait to begin until the expiration date is fast approaching. Give yourself plenty of time to think about the update and what, if any, changes need to be made. It’s a good idea to start your annual update three or four months ahead of the FTC deadline.

4. Develop an Update Plan Before Beginning.

There are numerous details and terms to verify and review when updating a franchise disclosure document, so it can be helpful to have a clear plan for how you’ll complete the process. How much time do you need to review each Item? Which elements of your FDD will you check first? Do you need to enlist help to get through the process? Having answers to these questions ahead of time can keep the update running smoothly.

5. Understand that a Transitional Period May be Necessary.

Your internal teams may need to review the updated FDD, so consider having a version that includes all the changes and edits that were made to the previous document. This allows a clear comparison to be made so the new provisions and guidelines can be followed. If your franchise is undergoing any new franchise deals or agreements during the update period, those deals may need to be closed prior to implementing the new FDD. Otherwise, the prospects must be provided with the new FDD and a restarted review period.

Final Thoughts

For the success of your franchise network it is imperative to keep your FDD up to date. Understand state and federal guidelines, have a process to track and make needed updates, and give yourself plenty of time before the deadline to complete the process. If you don’t, there’s a good possibility you will miss something vital rushing to meet the deadline.

Navigating ever-changing laws, regulations, and requirements on the federal and state levels can present a challenge for franchisors who are understandably focused on running their rapidly growing business. A franchise attorney can ease some of the frustrations caused by these extensive and fluctuating compliance requirements.

Address: 228 Hillcrest St, Orlando, FL 32801 | Phone: (407) 259-2426
Toll Free: (866) 801-2636 | Fax: (407) 391-3626 | Email: contact@walshbanks.com

© 2024 Walsh Banks Law – All Rights Reserved | Terms of Service | Privacy Policy | Legal Notice / Disclaimer

Call Us