While many people are hunkering down for the winter or gearing up to go on spring break, at EntrePartner we are gearing up for one thing: Franchise registration renewal season! Most franchisors are required to update their Franchise Disclosure Documents (FDD) and complete renewal registrations in specific states in March/April of each year (with exact dates depending on specific circumstances as outlined below). This article is designed to provide you the tools to help you make the most of renewal season.
1. Contact your Auditor ASAP
The renewal process requires that the franchisor entity’s updated audited financial statements be included in the renewal FDD, along with an auditor’s consent to use the financial statements in the document. The audit can often be the most time-consuming process for franchisors. Due to new guidance released by the Financial Accounting Standards Board (FASB), franchisors may have significant changes to account for in their audits this year, making this process even more time consuming. To make this a bit less painful, we recommend the following:
– Create a timeline with your auditor team, working backwards from the targeted issuance date of the renewal FDD. Include key dates for information gathering and on-site auditing activities if needed.
– Discuss affiliate entities up-front with your auditors to determine applicability of the rules to any other entities, corporate stores or other activities you may have. This will help avoid unexpected surprises.
– Request that auditors provide you with a list of documents and information that will be needed in the audit from the onset. This will allow your legal and financial teams to start gathering information ASAP.
– Ask your auditors if they will provide a discount for early completion. Many auditors are swamped during March and April, and will thus provide discounts to clients that complete their information early.
2. Hold an Internal Strategy Meeting
Although FDD renewals can be a difficult and distracting process, franchisors can use the update as an opportunity to hold corresponding strategy meetings with their executive or management teams. Big picture decisions will need to be incorporated into the FDD, so many franchisors like to use the first two months of the year to align on strategy for the coming year to avoid future FDD amendments. Items for consideration include:
– Will the franchisor incorporate any fee increases in initial franchise fees, ongoing royalty payments, or ad fund contributions?
– Are there any new fees or costs that the franchisor should consider – such as incorporating specific software or technology fees to cover the franchisors costs in adding new systems?
– Do the costs outlined in Item 7 accurately reflect current start-up investments, and are they competitive with costs outlined by competitors or other franchise systems? Are there areas where costs can be reduced?
– Are there any new major taglines or slogans that trademark protection should be applied for and incorporated into the FDD?
– Does the franchisor need to make a change in the manner in which it assigns territories or develops certain markets, like including area development agreements or limiting population size of designated territories?
– Where does the franchisor plan to sell franchises next year, and how many units does it plan to sell?
– Are there any new loan programs or financing options that the franchisor has identified?
3. Create an Internal Meeting Cadence and Assign Responsibilities
The decisions and process outlined above, and leading to an FDD renewal, are quite detailed and time-consuming. This workload is piled on top of the normal day-to-day operations of the franchisor and its staff – and thus can easily get put off until a later date. We recommend establishing a regular meeting cadence with key decision makers throughout the months of January through March to ensure that timelines kept on track. Here is a suggested process:
– Early January – Kick-off meeting with individuals responsible for legal (including outside counsel), operations, finance, marketing, sales and development and executive/management team. At this meeting, high-level issues and necessary decisions are identified and tasks are assigned.
– Bi-weekly – Legal and finance meet to review and complete Item 19, audit activities, budgeting and corresponding fee changes, financing options, and other material items.Sales/development to join when needed.
– Every 3 weeks – Executive team/management meets with legal to review key decisions needed and incorporate into FDD.
4. Prepare for Item 19
Statistics show that most franchisors include some type of Item 19 financial performance representation (FPR) in their FDD. This often involves gathering detailed data regarding both corporate-store performance, as well as franchised location performance. It is important that this information is accurate, complete, and comprehensive, so that the franchisor can safely rely on it to create its FPR. We suggest that franchisors begin collecting applicable revenue and expense information as early as possible, so that it can review its options for Item 19 and ensure that it isn’t rushing to obtain data later in the year that may skew its presentation.
Starting now and staying on top of key tasks and decisions will help to make the process go smoothly. It also helps all parties to minimize last minute fire drills, which can lead to mistakes and miscommunication among key parties. EntrePartner is offering discounted rates to clients that schedule their kick-off meeting in January – contact us to learn more!