The first quarter of 2025 is often a busy time for many franchisors—including those who franchise quick service restaurant (QSR) concepts. Many QSR franchisors are hard at work updating their franchise disclosure documents (FDD), form franchise agreements, and other contracts.
The Federal Trade Commission – Franchise Rule (the Franchise Rule), as found at 16 C.F.R. Parts 436 and 437, requires a franchisor to provide a prospective franchisee with its then-current FDD. What goes into an FDD is prescribed by the Franchise Rule. The requirement to furnish a materially accurate and complete FDD applies to all franchise opportunities unless one or more exemptions apply.
FDDs are organized by topic, with each topic known as an “Item.” There are 23 topics or “Items” covered in an FDD. As part of an FDD, a franchisor needs to disclose, among other things, the initial fees that a franchisee will pay as part of the franchise opportunity, an estimate of what a franchisee must invest in order to get up and running, background on the franchisor and its executives, and data concerning the health of the franchise system.
A franchisor may also elect to make financial performance representations in its FDD. Prospective franchisees often appreciate having financial performance representations in connection with a franchise offering, especially with regard to return on investment. If a franchisor decides to proceed with making financial performance representations, it must do so in accordance with the Franchise Rule. The representations must also conform with commentary issued on May 8, 2017 by the North American Securities Administrators Association (NASAA).
Appended to an FDD will be a number of exhibits, one of which being a form franchise agreement (FA) that is being offered to a prospective franchisee. The form FA sets forth the duties, responsibilities, rights, and obligations that are to govern the relationship between franchisor and franchisee. Parties are free to modify the form FA before entering into a franchise relationship. Those modifications are typically memorialized in one or more addenda to a finalized, fully-executed FA.
Notably (and relevant to this time of year), the Franchise Rule mandates that a franchisor update its FDD no later than one-hundred and twenty (120) days after the end of its fiscal year. Since the fiscal year of many franchisors is consistent with the January 1st through December 31st calendar year, now is when those franchisors are updating their FDDs and related written instruments.
Franchise regulators in registration states may require a franchisor to make additions and/or revisions to an annual FDD before the franchisor is registered to offer and sell franchises. These regulators check for facial compliance with relevant disclosures law, and do not verify the content of an FDD for factual accuracy.
Other states, like Florida, have a less cumbersome filing requirement that a franchisor must meet before it offers and sells franchises. Such a requirement, for instance, may be as limited and benign as filing a notice with the state before a franchise opportunity is offered and sold.
Notwithstanding franchise disclosure laws that may apply to a franchise offering, a franchisor must also be careful to comply with any franchise relationship laws that are on the books. For example, the State of New Jersey is not a franchise registration state or filing jurisdiction but does have a Franchise Practices Act that applies to certain franchisor-franchisee relationships.
Failure to comply with relevant franchise laws can be costly. A franchisor, as well as its individual executives, may be exposed to criminal and/or civil liability. Franchisors thus need to be mindful of both federal and state franchise disclosure laws. They also need to be mindful of state franchise relationship laws. An experienced franchise attorney can assist franchisors with their corporate, transactional, regulatory, and dispute resolution needs. Not consulting with one may be at a franchisor’s peril.
Ari N. Stern, Esq, is a partner of the Franchise & Distribution department at Fox Rothschild LLP. He can be reached at astern@foxrothschild.com.
