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!