In Part 1 of our 3 Part Disclosure Compliance series, we identified the players, formats, and recordkeeping of the FDD. Continuing, we enter Part 2: Preparing the Document. We look at how the document needs to be written, what needs to be addressed, and the laws on FDD updates.
To start, all information must be clear, concise, and legible. For example, use short sentences, definitive statements, and everyday language. The language used must be understandable by someone unfamiliar with the franchise business; this excludes jargon or other highly technical terms.
Financial representations need to be prepared by qualified professionals and reviewed by the responsible parties. The representations must be prepared with the best information available at the time and using appropriate accounting principles. Additionally, these representations are required to be substantiated in writing. Further, all financial information appears in item 19 of the Document. No other financial representations may be used or inconsistent with the representations found in item 19.
Every Item Must Be Addressed
Address all 23 items of the FDD. For any items that are not applicable, the company states what the item discloses and that it does not apply. For example, a franchisor with no financing would state in item 10 that the company does not offer franchising; this specifies what the item is meant to include and that it does not apply to them.
No Additional Information
No information that is not required or expressly permitted may be included in the FDD. One example of what is not allowed is promotional material. All information must be as specified by the Franchise Rule. In the case of misleading or unclear information, footnotes are permitted, but the original item statements may not be added to or altered.
Updating the FDD
Franchisors are allowed to update FDDs as frequently as they like, but at a minimum, they are required to make some updates annually and quarterly. Financial representations are a special circumstance as well. This ensures that the franchisors are updating information frequently. The 3 required updates:
- Annual Update
Every fiscal year, the franchisor is required to update the entire document within 120 days of the year’s close. After this period, only the updated FDD may be used. The document must include updated and audited financial information.
- Quarterly Update
At the end of every fiscal quarter the franchisor must prepare and include any material changes to item 22. This needs to take place within a reasonable time after the close. Some examples of what may need updating: bankruptcy, legal action against the franchisor. Any updated financial information is not required to be audited, but it must be stated as such.
- Changes to Financial Representations
If there are many material changes to financial representations between the annual and quarterly updates, franchisors must notify the prospective franchisee. This does not have to be in the form of an updated copy. It can be as simple as a phone call, email, or letter; however, the franchisor must be able to prove that the notification took place.
Make Your FDD Easy-to-Understand
Clarity is key to a compliant FDD. You need to include everything specified by the Franchise Rule; nothing less and nothing more. Financial figures need to be prepared and approved by the appropriate parties and writing needs to be understood by someone unfamiliar with the franchise business. In our following and final piece, we break down what needs to be included in each item of the FDD.
Look back at Part 1: The Basics.
Reference the FTC’s complete compliance guide on the Franchise Rule.