Most franchisors renewed their franchise offering registrations and updated their Franchise Disclosure Documents (FDD) in March or April 2020. At the same time, the COVID-19 pandemic was making landfall in the United States. State governments initially took a cautious approach, before typically requiring widespread business closures or limitations on the number of individuals in a business establishment. Some of the hardest hit industries from these closures and restrictions were the restaurant, hospitality, and fitness industries. Over the summer, franchisors had to refocus to support struggling franchisees faced with closures and restrictions.
At the time of renewing and registering the 2020 FDD earlier this year, most franchisors could not have predicted the scope and duration of these closures and restrictions, or their affect on the franchise system. But several months into the pandemic, it is now clear that there have been or may be changes to the franchisor and franchise system. If your system has had any of these changes or has suffered any other material changes in the FDD since filing of your renewal application, you may be required to amend the FDD at this time, notwithstanding the short time the document has been in use.
Now that we are more than 8 months into the COVID-19 pandemic, franchisors need to review whether there have been any material changes to the franchisor or franchise system that will require the FDD to be amended under state and federal law.
Here are a couple common changes that many franchisors or franchise systems have faced as a result of the pandemic. If the change is material, state and federal franchise law require that the FDD be amended immediately or within a certain number of days.
Initial Estimated Investment
If the estimated initial investment required by a franchisee to open its outlet has materially changed from what is in Item 7 of the FDD, the FDD should be amended to update Item 7. Many franchised businesses have incurred additional costs to install safety measures such as acrylic or glass sneeze guards, for example. Others may require a larger supply of cleaning and disinfecting supplies.
Financial Performance Representations
Financial performance representations (FPRs) based on pre-COVID-19 data from 2019 may no longer be accurate in today's environment with government restrictions or mandated closures. If it is not likely that a franchisee would achieve comparable financial numbers as shown in Item 19 of the FDD, the franchisor may be required to amend its FDD.
If the franchisor is implementing new service offerings, such as delivery or virtual appointments, as a result of COVID-19, the franchisor may be required to amend its FDD. Many restaurants, for example, are permitting third-party delivery through aggregators or permitting franchisees to make deliveries themselves. Likewise, other businesses such as tutoring businesses are now offering virtual sessions. These new lines of service may require additional or different disclosures in various parts of the FDD.
Changes to the franchisor's personnel listed in Item 2 of the FDD is typically material and the franchisor will need to amend its FDD. Unfortunately, the pandemic has led many companies to restructure or layoff employees. If there are changes to the corporate structure of the franchisor or its affiliates or parents, Item 1 of the FDD would need to be amended.
If your system has had any of these changes or other material changes, you should contact your franchise attorney to discuss whether an amendment filing is required to continue selling franchises.