As you prepare for the upcoming renewal season, we recognize that increased efficiency is likely a top priority for your franchise system. The Faegre & Benson franchise team has identified 14 tips to help you to save time and money in preparing for a successful 2010 renewal season.
1. Stay On Top of Your Financial Statements. Talk to your certified public accountant well before the end of the fiscal year to determine whether additional capitalization is needed to avoid imposition of financial assurances (escrow, bond or fee deferral) or to see if other adjustments can be made to enhance your financial statements and profitability. If you wait until after the end of the fiscal year, it will be too late to address these issues.
You may also want to ensure your accountant understands the urgency of completing the 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 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!
2. 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.
3. Compile in Advance. You can begin to compile information needed to update your franchise disclosure document 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.
4. Update as You Go. As changes to your franchise system occur, make a note of all transfer 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 those that have left the system due to terminations, non-renewals and transfers and other reasons.
5. 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 noncompete 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 noncompete provisions adequate in light of recent judicial decisions?
6. 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 Franchise Disclosure Document 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 it may be challenged. That means documenting assumptions included in the FPR and reasons why you consider the FPR to be reasonable.
7. Stick to Your Target Dates. In the renewal letter we will send to you in December, we include target deadlines to keep the process moving smoothly and in a timely fashion. Our experience is that clients who meet these deadlines generally get their applications filed much earlier than clients who do not. When you get your renewal letter, let us know if the time lines work for you. If they do not, work with your attorneys to revise them.
8. 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 prior fiscal year in a separate file and present copies of the filings with your renewal materials.
9. Take an Inventory of Your Interests. Review whether any of your officers own an interest in any supplier, have been involved in litigation or administrative proceedings, or have filed for bankruptcy in the prior year. You will need to review this with respect to both new and existing officers.
10. Confirm Proper Trademark Maintenance. What is the status of your company's intellectual property? Talk to your trademark attorney to verify your trademarks are registered properly and maintained. Trademark registration is not a one-time procedure. Once a registration is obtained, certain maintenance documents need to be filed with the United States Patent and Trademark Office at various intervals to maintain the registration.
11. 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 apply 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. Although While New York's apparent focus is on ensuring franchisee tax compliance, the reporting law will also resulting 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.
12. 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 – d irect and indirect – that are offered by a franchisor, its agents or affiliates must be disclosed in Item 10.
13. Review Web Site for Outdated Information. Examiners will (and have) audited Web sites to check for disclaimers, false advertisements and noncompliant financial representations. Be mindful of the impact information on your Website can have on your system from a regulatory standpoint as well as from a franchise sales perspective.
14. Disclaim Disclaimers. The Amended FTC Rule prohibits use of certain disclaimers. Any integration clause should be revised accordingly. You can, however, continue to use closing checklists or questionnaires without use of "disclaimers" prohibited by the rule and/or state laws.
These Tips to Help Franchisors Prepare for the 2010 Renewal Season are published by the law firm of Faegre & Benson LLP. Further details are necessary for a complete understanding of the subjects covered by this summary. For this reason, the specific advice of legal counsel is recommended before acting on any matter discussed within.