For most people, January 1 means making resolutions, going back to the gym, or setting a new goal for the year. But for franchisors, January 1 means their Franchise Disclosure Document (FDD) has to be updated within 120 days. During the time the FDD is being updated, the previous year’s FDD may be used, but after 120 days, the New Year’s FDD is mandatory. Although existing franchisees are not entitled to rely on the new FDD, any prospective franchisee is required to be provided with it.
This requirement comes from the Federal Trade Commission’s Franchise Rule in Title 16 of the Code of Federal Regulations, Part 436. Section 436.7(a) of the Franchise Rule says the following:
All information in the disclosure document shall be current as of the close of the franchisor's most recent fiscal year. After the close of the fiscal year, the franchisor shall, within 120 days, prepare a revised disclosure document, after which a franchise seller may distribute only the revised document and no other disclosure document.
Thus, if the franchisor’s fiscal year ends on a different date than January 1, the deadline for its new FDD changes accordingly.
Also, if the franchisor is working with any prospective franchisees and gave them the previous year’s FDD, the franchisee must be provided with the new FDD. This requirement comes from Section 436.7(d) of the Franchise rules, which says the following:
When furnishing a disclosure document, the franchise seller shall notify the prospective franchisee of any material changes that the seller knows or should have known occurred in the information contained in any financial performance representation ....
Each of the 23 FDD Items required by the FDD must be updated with current information.
A franchisor’s failure to update the FDD gives any potential franchisees who relied on the old FDD a claim for unfair business practices, and, possibly, a way to get out of the franchise agreement entirely.
DYE CULIK PC represents franchisees in negotiations and disputes with franchisors throughout North Carolina, and especially in the Charlotte metro area. If you are considering purchasing a franchise, or if you already purchased one and are having differences with your franchisor, contact us at 980-999-3557 to see how we can help.