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On April 15th, NASAA issued some revisions to recently published commentary. The revised commentary issued April 15th, clarified some of text in the initial commentary and provided more answers to questions about Area Representatives and franchise disclosures. Take a look at the questions and answers regarding Area Representatives.
 
1. As part of the Item 1 of the unit franchise disclosure document, must a franchisor disclose the availability of Area Representative franchises?
 
Answer: Yes, the availability of the Area Representative franchises must be disclosed in Item 1 of the unit franchise disclosure document. And, inversely the Area Representative franchise disclosure document should state the availability of unit franchises in Item 1.
 
2. Must Area Representatives be listed in Item 2 as having management responsibility?
 
Answer: Maybe. Area Representatives need only be listed in Item 2, if the Area Representative has management responsibilities for the sale or operations of the franchise system.
 
3. If an Area Representative is listed in Item 2 as having Management Responsibilities, do litigation and bankruptcy information about the Area Representative have be disclosed in Item 3 and Item 4?
 
Answer: Yes. If the Area Representative has management responsibilities, their individual litigation and bankruptcy histories must be listed in Item 3 and Item 4.
 
The revised NASAA commentary was released just 15 days before most franchisor’s franchise disclosure document were set to expire. No worries. Franchisors do not need to comply with the NASAA commentary until next year’s franchise disclosure update.
Want to learn more about the changes to the NASAA commentary? We have completed a comparison between the original and revised commentary. Email me at [email protected] to get a copy of the comparison document.
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 It is that time of year again, when franchisors are busy filing state franchise registrations.  The state of Maryland has a few tips for all those filers.  The tips can be found on the State of Maryland’s website, but I want to share a couple.  Here are 5 tips taken from the Maryland Franchise Examiners: 

 1.      Do not ignore the requirement in Item 12 to specifically disclose whether or not the franchisor provides an “exclusive territory.”  We covered this topic in one of our posts.  For more information see:  https://gettinslaw.com/blog/2012/10/25/lets-get-physical-about-exclusivity/

2.      Make sure the dollar figures on the FTC cover page match the corresponding dollar figures disclosed in Items 5 and 7.

3.      Make sure that the franchise and company owned outlet totals disclosed in Table 1 of Item 20 match the corresponding totals in Table 3 and Table 4.

4.      Do not add more disclaimer language than is specified under the FTC Rule [and, where applicable, the NASAA Commentary], or repeat the disclaimer language multiple times.

5.      Include the correct “issuance date” on both the FTC cover page and receipt pages of the FDD. The issuance date is the date the franchisor finalizes that version of the FDD. The “effective date” is the date when a state formally registers the FDD.

To see the Maryland Security Regulations advise for registration visit:  http://www.oag.state.md.us/Securities/Franchise_Registration_Application_1_2014.pdf

 Have more questions about state registration or exemption?  We want to hear from you.  Give us a call or drop us an email!

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As you are probably already aware by now, the Franchise Disclosure Document must be updated annually 120 days from the close of the franchisor’s fiscal year. For most franchisors the deadline is April 30th. When the franchise disclosure document is updated, the franchisor must assign an “issuance date” for the disclosure document.
For states that do not require the registration of the franchise disclosure document, the issuance date is also the effective date. It is the date that is listed on the cover sheet of the FDD or franchise disclosure document. It is also listed on the receipt page or Item 23 of the FDD. For registration states such as Minnesota, Maryland, New York, Rhode Island, North Dakota, South Dakota, Virginia, Wisconsin, Indiana, California, Hawaii, Illinois, and Washington, the effective date is the date that the state examiner declares the franchise disclosure document effective.
What is a good day? What is a good day to issue your annual updated FDD or franchise disclosure document? Should you make it today, tomorrow, or next week Tuesday?
The issuance or effective date will have an impact on franchise sales and the franchise renewal process. Once the franchise disclosure document is issued, the world stops. All prospective franchisees and renewing franchisees need to be re-disclosed with the new updated franchise disclosure document or FDD and a second holding period must be granted to the prospective franchisee or renewing franchisee before the transaction can be completed. If the prospective franchisee or renewing franchisee is in a registration state, re-disclosure and the second holding period cannot commence until the state declares the new updated FDD effective.
What does that mean? Consider this hypothetical. A prospective franchisee is in the sales process, the franchisee has attended discovery day, but the territory or site for the new franchise location is still being worked out. It is April 8th. On April 9th the new updated FDD is issued and franchisee has not signed. Stop. The deal is on hold now. The prospective franchisee must be re-disclosed. Look at your calendar. Give the prospective franchisee a copy of the new updated franchise disclosure document. Count 14 days. The prospective franchisee cannot sign the franchise agreement for 14 days.
Now, let’s say the prospective franchisee is in California. April 9th you issue the franchise disclosure document, you send your annual franchise renewal application to the state of California on April 10th. Put the pen down. Close your email. You cannot sign the franchise agreement yet. You cannot re-disclosure the prospective franchisee yet. You have to wait. You have to wait until the state says your new franchise disclosure document is effective. The sales process is “on hold.”
Now, let’s re-image. You have a prospective franchisee in California. It is still April 8th. The deal is almost cemented. The prospective franchisee has been disclosed; she has attended discovery day. The only thing left is to work out the Territory. Get it worked out! The new updated FDD is almost completed. You work out the Territory; get the franchise documents to the prospective franchisee for signing. It is April 9th. The prospective franchisee signs the franchise documents on the 17th. You issue the updated franchise disclosure document on the 19th and send it the state for registration. No re-disclosure is required. The deal is done.
When should you issue the new annually updated FDD or franchise disclosure document? Don’t ask me. Ask the sales guy. Just make it within 120 days from the close of the fiscal year.
Contract us for information about state registration and re-disclosure!

Well, not in all states. Just in some states. Back in 2008, with the effectiveness of the Amended FTC Franchise Disclosure Rule, many franchisors moved to disclosing and maintaining their Franchise Disclosure Documents [FDD] electronically. But, the embrace for the electronic format has been slow to emerge in the franchise registration process. Sixteen states require the filing of franchise registration or exemptions.
There was a greater lag in the state franchise registration process. The state franchise registration process got stuck pre-2008. Thirteen of the states required the submission of hard copy franchise disclosure documents as part of the franchise registration applications. There was a soft attempt at becoming high tech. Some states began to ask for franchise disclosure documents on CD Rom along with hard copies of the franchise disclosure documents. Who uses CD Roms anymore? That is so yesterday.
Finally, some states are really getting HI-Tech. The states of Minnesota, Rhode Island, Washington and Wisconsin have moved to accepting franchise registration applications online-efiling. The efiling of franchise registrations will eliminate the cost and time expended to deliver huge franchise registration applications to state examiners. It is a happy moment in the franchise world.
Have questions about franchise registrations or exemptions?  Contract us.
 

It is not new in franchising. Customers, employees, suppliers have all attempted to hold the franchisor responsible for acts of the franchisees. A recent case against McDonalds by a class of the employees is no exception. There have been numerous cases where employees of the franchisees have attempted to sue the franchisor. In fact, we have talked about these cases on our blog before. But, what’s new, is the claim that the franchisor is a joint employer.
But, what is a ‘joint employer’? How can employees claim that McDonald’s franchisor is the employer of the franchisees’ employees? And, what happens if McDonalds is found to be a joint employer?
Realize the definition of employer is expansive. It is not just expansive, it is hugely expansive. The Supreme Court of the United States has even made the proclamation that the definition of the employer is “the broadest definition that has ever been included in any one act.” United States v. Rosenwasser 323 U.S. 360, 363 n.3 (1945).
 An employer is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d). That is a circular definition. But, what it says is: ‘If you act like an employer you are an employer.”
The regulations provide an understanding of what constitutes a joint employer. It starts by saying that “A single individual may stand in the relation of an employee to two or more employers at the same time under the Fair Labor Standards Act of 1938.” With that opening statement we know that joint employment is possible. Now, what is it? It is defined in the negative. Joint Employment is not when “two or more employers are acting entirely independently of each other and are completely disassociated with respect to the employment of a particular employee….” 29 C.F.R. § 791.2
Courts have established numerous economic reality tests to determine joint employment. There is the NLRB test, the Lewis Test, the Bonnette Test and in 2012 the Enterprise Test was created. The Enterprise Test was developed in the precedential case of IN RE: ENTERPRISE RENT-A-CAR WAGE & HOUR EMPLOYMENT PRACTICES LITIGATION. It blends together factors from the other tests. It a rather nice list of what is considered in a joint employment case. There are 4 prongs. The more prongs that you answer “I do have” the more likely you are to be considered a joint employer. Here are the 4 prongs:
1) authority to hire and fire the relevant employees;
2) authority to promulgate work rules and assignments and to set the employees’ conditions of employment: compensation, benefits, and work schedules, including the rate and method of payment;
3) involvement in day-to-day employee supervision, including employee discipline; and
4) actual control of employee records, such as payroll, insurance, or taxes.
What happens if you are found to be a joint employer? Joint employers are charged with complying with the wage and hour laws. If there is a violation, both joint employers can be liable. The upshot; if McDonald’s franchisor is held to be a joint employer, the McDonald’s franchisor could be liable for double and maybe even triple the wages and overtime pay that its franchisees should have paid to its employees. Plus McDonald’s franchisor will have to pay its own attorney fees and the employees’ attorney fees. That is one biggie sized Big Mac of a legal bill!
 

With the annual franchise disclosure document [FDD] update process well under way.  There are countless terms and definitions that you need to know.  Here is listing of some of the terms and definition.

Annual FDD Update:			The FTC franchise disclosure rule and state laws mandate that requires the franchise disclosure document or FDD to be update with the previous year’s audit financials, of listing franchise outlets, other previous year’s data no later than 120 days from the close of the fiscal year.
Material Change:	A material change is any change that could affect whether a prospective franchisee will buy or not buy the franchise.  Conservatively any information that is contained in Franchise Disclosure Document [FDD] can be considered material.Therefore, any change in the information listed may be material change.  Per franchise disclosure laws, if a material change occurs the franchise disclosure document must be amend and amended state filings must be submitted.
Estimated Initial Franchise Investment.					The estimate of initial franchise investment encompasses any expenditure that a prospective franchisee will incur in starting the the franchise business, including expenditure to the franchisors or any third parties such as insurance agents, vendors, and landlords.The estimated initial franchise investment is outlined in tabular form and the total estimated initial investment is listed on the franchise disclosure document cover. The estimated initial investment is often used by franchise brokers, franchise magazines, and others to categorize franchise opportunities.
Officers, Directors, & Sellers				The Officers, Directors, and Sellers are any persons who have management responsibility relating to the sale or operation of franchises offered by the disclosure document.A listing of Officers, Directors, and Sellers must be disclosed in the franchise disclosure document.  Pursuant to disclosure requirements, the Officers, Directors, Sellers must state their title and their work history for the last 5 years. Additional information regarding Officers, Directors, and Sellers must be provide in the litigation, bankruptcy, and vendor/supplier interest items in the franchise disclosure document.
Franchisee that Left the System		Any franchisee who has had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement or has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.Franchisee that left the system in the most recently completed fiscal year must be identified in a franchise disclosure document exhibit.
Financial Performance Representation [FPR]					A Financial Performance Representation is any representation, including any oral, written, or visual representation, to a prospective franchisee, including a representation in the general media that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits. The term includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables. Franchisors are not required to make Financial Performance Representation in the franchise disclosure document.  However, if no Financial Performance Representation is disclosed in the franchise disclosure document, the franchisors may only implicitly or expressly provide information to prospective franchisee regarding the potential sales, income, or profits.
Item 20 outlet definitions	Non-Renewal:  A franchise outlet that was not renewed upon the expiration of the franchise agreement. Reacquisition:  A franchise outlet that was returned to the franchisor during the term of the franchise agreement in exchange for cash, forgiveness of debt or other consideration. Ceased Operation:  A franchise outlet that for any reason other than transfer, termination, non-renewal or reacquisition stop operating. Signed But Not Open:  Signed but not opened, means the franchisee and franchisor have signed a franchise agreement, but the franchise outlet has not opened Transfer:  Transfer means the sale or acquisition of a controlling interest in the franchise outlet to anyone other than the franchisor during the term of the franchise agreement Termination:  A franchise outlet that prior to the end of the franchise agreement term is terminated by the franchisor without providing any money or consideration to the franchisee
Negotiated Prices					A purchase agreement negotiated by the franchisor with suppliers, including price terms, for the benefit of the franchisee
Required Purchases					Required purchases are any obligation on the part of the franchisee to purchase or lease goods, services, or supplies from a specific supplier for the establishment or operation of the franchise business.Required purchase must be disclosed in Item 8 of the franchise disclosure document.
Franchisee Associations						An association of franchisees of the franchise brand.If the franchisor creates, sponsors, or endorses the franchisee association must be disclosed in the franchise document. If the franchisee association is not created, sponsored, or endorsed by the franchisor, the association must only disclosed in the franchise disclosure document if [1] the organization is recognized under state law and [2] the association expressly requests annually to be included in the franchise disclosure document.

What happened last year? What changes do you want for next year? Under federal law the franchise disclosure document [FDD] must be updated no later than 120 days from the close of the franchisor’s fiscal year. 

Any information that is listed in the disclosure document can be considered material. By identifying the changes now, during the updating process, you will prevent having to amend the franchise disclosure document later. Amending the franchise disclosure document later, will cost you money and could delay the sale of your franchises and renewals!
Here are 20 questions to help your identify changes to include as part of the franchise disclosure document update process.
 

	Yes	No
1.  Have there been any changes in your business entity, parents, or affiliates?	_______	________
2.  Have there been any changes in the regulations or laws that affect the industry, which the franchise business operates?	_______	________
3.  Have you sued any franchisees or were any claims filed in court arbitration, bankruptcies, or governmental actions against you or any franchisor seller staff, directors, or officers?	_______	________
4.  Are there any updates to the litigation items listed in the franchise disclosure document?	_______	________
5.  Do you wish any changes in the initial franchise fees including discount on initial franchise fees?	_______	________

 

6.  Are there any changes to on-going fees charged franchisees?	_______	________
7.  Have there been a change in the franchisee initial investment costs?	_______	________
8.  Have you negotiated any new purchase arrangements on behalf of your franchisees or altered any required purchase arrangements?	_______	________
9.  Have you changed or begun offering any financing to the franchisees? such as promissory notes for pass due royalty fees or promissory notes for installment payments of initial franchise fee	_______	________
10.  Have you made any changes to the computer, equipment, or software that your franchisee must use or purchase?	_______	________

11.  Have you made any changes to your training programs or trainers?	_______	________
12.  Has there been any change in franchisor seller staff, directors, or officers?	_______	________
13.  Do you wish to make any changes to the franchisee obligations such as obligations to participate in the franchise business, authorized products or services?	_______	________
14.  Do you wish to make any changes to the franchise advertising requirements including local, national, or regional?	_______	________
15.  Have you registered any new trademarks or received notice of anyone else’s superior right to use of your marks?	_______	________
16.  Do you wish to provide or update an Item 19 Financial Performance Representation in your FDD?	_______	________
17.  Have you granted any waivers or discounts on fees, non-competes, other post termination obligations or other franchise obligations?	_______	________
18.  Do you wish any changes to the contracts and agreement?	_______	________
19.  Have there been changes to your operating manual?  Including the number of pages or changes to the table of content…	_______	________
20.  Are there any franchisee associations that need to be listed?	_______	________

 

Believe it or not, it is the new year again.  The holidays are past.  The focus is back on business.  For franchisors it is time to think about updating the franchise disclosure document [FDD] for 2014. Under federal law the franchise disclosure document [FDD] must be updated no later than 120 days from the close of the franchisor’s fiscal year.  For must franchisors, the franchise disclosure document update must be completed by April 30th.  Last year we posted a FDD update timeline.  The timeline is aimed at pacing the updating process and ensuring that the FDD update is done on time.   We thought the franchise disclosure document update timeline was so great, we are republishing it for 2014.

Eliminate the last minute blitz and going dark.  Use the timeline to stay on track with the franchise disclosure document update process!  Stay tuned for our upcoming posts detailing more of the franchise disclosure updating process.