The end of the year is usually the most exciting and festive time for many. For franchisors, however, it is also a reminder of the upcoming franchise renewal season if the franchisor has a December 31 fiscal year end. As we head into the 2020 annual renewal season, here our top 4 issues and recommendations for franchisors as they look to update their Franchise Disclosure Documents (FDDs) and franchise offerings:
New State Cover Pages
Starting January 1, 2020, all franchisors will need to include new state cover sheets and a modified State Effective Dates page in their FDD, per new rules issued by the North American Securities Administrators Association (NASAA) Franchisors will need to comply with the new FDD requirements starting with any 2020 FDD amendments or annual renewals. Contact our franchise attorneys to revise your FDD.
If they haven’t already, franchisors should consider removing any “no-poaching” or non-solicitation clauses from their form Franchise Agreements or other agreements that restricted franchisees from hiring the employees of another franchisee in the system, or from a company-owned store. Washington state has started to issue Civil Investigative Demands to franchisors doing business in that state that will ultimately require these franchisors to remove these provisions, and agree to other restrictions on enforcement of existing agreements. Other states may follow, but even if they don’t, the Washington restrictions are broad and will affect franchisors’ actions in other states. The best approach may be to remove these clauses whether required to or not by Washington. Franchisors may also need to disclose any Assurances of Discontinuation that they may have entered into with Washington in their Item 3 disclosure filed in Washington.
The Financial Accounting Standards Board issued its Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) in 2014. The new guidance establishes the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. For non-public franchisors that rely on a franchisor net worth exemption from registration or disclosure, FASB 606 may result in the franchisor’s net worth falling below the minimum requirement to claim the exemption—and therefore loss of the exemption. Even for smaller franchisors which typically do not rely on a net worth exemption, FASB 606 may weaken the presentation of its financials, and therefore a state may request a method of financial assurance to register, such as a surety bond, escrow, or deferral of initial franchise fees. We are recommending to our clients that they review the numbers before year end as there may be ways to minimize the effect of the implementation of FASB 606.
The technology systems used in franchise systems, or by franchisees as they interact with customers, changes constantly. Many retail and restaurant franchisors need to account for third party delivery services, and the calculation of gross sales and royalties. In all industries, franchisees often handle personal or confidential information such as credit card and payment information, contact information, and even personal health information. Franchisors need to carefully consider the safeguards that they require franchisees to implement to protect this data, and also the sharing of this data between franchisees and the franchisor. Changes in technology and consumer demands will often require changes to the FDD and Franchise Agreement.
Larkin Hoffman Franchising
For over 40 years, Larkin Hoffman has been representing small and large franchisors alike in complying with ever-changing franchise laws and practice. Our award-wining team has extensive experience in the business and legal aspects of franchising, and are regular presenters at the largest franchise conventions each year. We will be working with our franchise clients to update their FDDs and agreements based on these and other changes to the franchising model or regulatory landscape. Contact us to see how we can help you protect and grow your franchise system.