Tips on Preparing for the 2010 Renewal Season
As franchisors prepare for the upcoming renewal season, increased efficiency is likely a top priority for your franchise system. Our franchise team at Faegre & Benson has identified 12 tips to help you save time and money in preparing for a successful 2010 renewal season.
- Stay on top of your financial statements. You will want to ensure that your certified public accountant understands the urgency of completing your audit as quickly as possible following year-end. Filing the last week in March because your audited financial statements weren't available sooner can delay the registration process by weeks and, in some states, by months. Examiners review Franchise Disclosure Documents (FDDs) in the order received. With hundreds of applications being filed during that last week, yours could end up at the bottom of the stack. Registration delays can cost you franchise sales!
- Be mindful of discovery days/closing sales. Be aware of any pending franchise sales, discovery days, or other franchise sales activities. To the extent possible, plan to sign any pending franchise agreements before filing your renewal applications. In some states, you must "go dark" until the renewal is approved. Since some state examiners take weeks (and in some instances, months) to complete their review, you cannot sell any franchises in those states during this period. You must coordinate your franchise sales activities accordingly.
- Compile in advance. You can begin to compile information needed to update your FDD before the end of the fiscal year. Gathering information for Items 2, 3, 4, 7, 8, 11, 19, and 20, as well as for the Franchise Seller Information sheet, can take a great deal of time. So please start early.
- Update as you go. As changes to your franchise system occur, make a note of all transfers and terminations of franchises and area developer rights. You should keep a running list of contact information for franchisees who have signed agreements but have not opened, as well as for those who have left the system because of terminations, non-renewals, transfers, and for any other reasons.
- Know your commitments. Review your obligations described in Item 11, the Franchise Agreement; and, if applicable, other agreements between you and your franchisees. Consider whether any revisions or changes to your system are in order and, if so, incorporate them into the renewal process. This avoids the need for another amendment filing.
Carefully review your franchise agreement and other agreements you use, including non-compete agreements, area development agreements, equipment leases, and confidentiality agreements. Have issues arisen in your system that are not adequately addressed in the current documents? Do you accurately address any territory rights granted to franchisees and any rights you reserve? Do you account for product supply rebates and advertising funds in your system? Are national account opportunities addressed adequately? Are your non-compete provisions adequate in light of recent judicial decisions?
- Consider financial representations. If you do not currently include an Item 19 Financial Performance Representation (FPR), should you? If you choose to make an FPR, review the process and finished product very carefully. Simply including financial information about franchised or company-owned units in your FDD is not enough to comply with requirements of state and federal franchise laws. Your FPR must meet all regulatory requirements, i.e., it must be reasonable and not misleading. Prepare any FPR with the understanding that it may be challenged. This means documenting assumptions included in the FPR and reasons you consider the FPR to be reasonable.
- Pay attention to legal matters. Is your company in good standing in the states where you need to be? Do you need to disclose new franchisor- or franchisee-initiated litigation? It is prudent to keep a list of all pleadings filed and received during the previous fiscal year in a separate file and present copies of the filings with your renewal materials.
- Take an inventory of your interests. Review whether any of your officers owns an interest in any supplier, has been involved in litigation or administrative proceedings, or has filed for bankruptcy in the previous year. You will need to review this with respect to both new and existing officers.
- Confirm proper trademark maintenance. What is the status of your company's intellectual property? Talk to your trademark attorney to verify that your trademarks are registered and maintained properly. Trademark registration is not a one-time procedure. Once a registration is obtained, certain maintenance documents must be filed with the United States Patent and Trademark Office at various intervals to maintain the registration.
- Ensure compliance with new tax initiatives. Now is the time to assess your tax position, especially given increased efforts by certain states to impose income tax and reporting obligations on out-of-state franchisors. Franchisors must take affirmative steps to comply with recent initiatives in California and New York.
California has advised out-of-state franchisors either (a) to qualify to do business in California as a foreign corporation (which then requires the franchisor's acknowledgement that it will comply with all applicable laws, including tax laws), or (b) to accept that their California-based franchisees will be required to withhold tax payments from royalties paid to the franchisor.
In New York, recent legislation requires franchisors to verify a number of facts specific to their New York franchisees, e.g., amount of royalties paid to the franchisor, franchisee's gross sales, etc. While New York's apparent focus is on ensuring franchisee tax compliance, the reporting law will also result in significant information about the franchisor-franchisee relationship being disclosed to the state. This information could potentially be used to claim franchisors have sufficient "nexus" with New York for tax purposes.
- Disclose franchisee financing. Some franchisors have responded to the current economic climate by offering financing (or financial assistance, such as guarantees or finance referral programs) to franchisees. Remember that all financing arrangements -- direct and indirect --offered by a franchisor, its agents, or its affiliates must be disclosed in Item 10.
- Review your website for outdated information. Examiners will (and have) audited websites to check for disclaimers, false advertisements, and noncompliant financial representations. Be mindful of the impact that information on your website can have on your system from a regulatory standpoint, as well as from a franchise sales perspective.
Brian Schnell is a leader of the Faegre & Benson Franchise Team, which represents more than 200 franchisors in 35 states and 7 countries. He is a past chair of the IFA Supplier Forum; a member of its Legal/Legislative, Awards, and Membership committees; and in 2009 became the first male to receive the IFA Women's Franchise Committee Crystal Compass. Contact him at 612-766-7472 or firstname.lastname@example.org.
This article is provided for general informational purposes only and should not be considered or construed as legal advice or opinion concerning any specific circumstances or facts. You are encouraged to consult with your own franchise lawyer regarding any specific issue, situation, or legal question you may have.
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