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.