As we turn the page from 2021 to 2022 we turn our attention to the upcoming franchise renewal season. To say the least, 2021 was a challenging but productive time in franchising that continued well after the “busy season” of annual renewals. From the introduction of new concepts to the restructuring of existing ones, May through December saw our franchise team working with various franchisors to file numerous initial registrations and amendment applications. Those experiences resulted in some lessons we thought we would pass along to you in hopes of making your renewal process a bit more seamless:
Tip 1 – Make Friends with EFD
North Dakota is the first state to require that all franchise filings and corresponding fee payments be made through the NASAA Electronic Filing Depository (“EFD”). Presumably other states at some point will follow suit. We have used the EFD for various state filings and have found the process to be more streamlined than many other state electronic filing processes, but the costs are not insignificant. However, the jury is still out on whether the cost savings due to reduced copying, shipping and other third-party charges outweigh the cost charged to use the EFD. In any event, if you do your own filings, we recommend spending some time working with EFD before the filing date so that you have a good idea of how it works moving forward.
Tip 2 – Washington Addenda Updates
Washington has been very active in commenting on proposed franchise registrations over the last few years. Washington continues to require updates of the traditional Washington Addenda to the Franchise Agreement to not only apply to the Franchise Disclosure Document but also the Franchise Agreement “and any related agreements”.
Tip 3 – California Dreaming
California has added a new wrinkle as certain examiners are requiring the inclusion of the language below in the California Franchise Agreement Addendum:
No disclaimer, questionnaire, clause, or statement signed by a franchisee in connection with the commencement of the franchise relationship shall be construed or interpreted as waiving any claim of fraud in the inducement, whether common law or statutory, or as disclaiming reliance on or the right to rely upon any statement made or information provided by any franchisor, broker or other person acting on behalf of the franchisor that was a material inducement to a franchisee’s investment. This provision supersedes any other or inconsistent term of any document executed in connection with the franchise.
Tip 4 – Review Your Integration Clauses
Hawaii examiners have taken a renewed interest in integration clauses, commenting on them unless they include the exact language found in the FTC Compliance Guide. Franchisors should review the integration clauses in their franchise and related agreements to confirm that they comply with the FTC Compliance Guide and to update them if they do not. Otherwise, a comment letter may be forthcoming.
Tip 5 – New York State of Mind
New York has continued to focus on Items 5, 7, and the FDD Cover Page inquiring as to the calculation of the Item 7 initial investment ranges, and the amounts disclosed on the Cover Page; specifically, the amounts paid to the franchisor or its affiliates. If these calculations are not apparent on their face we would recommend the inclusion of an explanation in your cover letter to avoid a comment asking for an explanation of these calculations.
Bonus Tips
As we always try to give our clients a little more than they expected, we thought we would provide you with the “Bonus Tips” below:
Financial Performance Representations (FPR’s)
2021 saw many franchisors include financial information in Item 19 from 2019 and 2020 to show a prospect the results of business operations pre-pandemic and during the height of the pandemic. This approach seemed to be the most favored by franchisors and regulators alike as it provided a prospect with a longer view of the financial results of the businesses included in Item 19 at a time when the business landscape was uncertain. Although many franchisors will continue with this strategy in 2022 it is arguably unneeded as the results of 2021, achieved during the pandemic, should provide prospects with an excellent overview of the financial results of the business during the pandemic, which unfortunately does not seem to be going away in the foreseeable future.
Timing is Everything
Approvals came in slower than usual during the peak filing months of April-June. In the last half of 2021, we have seen faster response times from states reviewing franchise filings. However, due to various factors, many states continue to be understaffed and state examiners overworked. If possible, try to file your annual renewal by the third week in March, putting your filing ahead of the long line of those that will be filed at the end of March and in April.
Questionnaires and Acknowledgments
NASAA’s recent proposed Statement of Policy regarding the use of Franchise Questionnaires and Acknowledgments may immediately impact the content and use of these documents by franchisors. As a result, this is an issue you will want to review as part of your 2022 renewals.
Happy New Year from our franchise team to yours! We hope 2022 is off to a great start and look forward to working with you.