Almost every year at the IFA Annual Legal Symposium in Washington D.C., a panel of distinguished franchise attorneys and state regulators will discuss best practices in drafting a franchise disclosure document in compliance with the FTC Franchise Rule. This year was no different and the workshop “Thorny FDD Disclosure Issues” offered a number of best practices and tips to help draft an FDD that is compliant with federal rule and state law and will breeze through the state registration process:
- Item 2 (Business Experience). Franchise systems often have a difficult time determining what officers to disclosure. The panelists reminded attendees that when making this decision, the franchisor should ask themselves whether “an individual’s involvement in either sales or operations is such that a franchisee would rely on his or her expertise, formulation of policy, or control of the system.”
- Item 3 (Litigation). Remember that the FTC Rule requires that all material terms to a settlement must be disclosed regardless of whether the settlement agreement is confidential. Legal counsel should remind franchise system clients of this fact so they are not surprised when state regulators demand the information be included in Item 3.
- Item 6 (Other Fees). Remember to distinguish between negotiated discounts in initial fees verses other fees. Item 5 requires disclosure of discounted initial fees during the last fiscal year but Item 6 does not require the disclosure of discounted royalty deals.
- Item 8 (Restrictions on Sources of Products and Services). Item 8 requires franchisors to disclose the precise basis by which a franchisor receives consideration for required purchases or leases made by the franchisees. State regulators interpret this as a requirement to specify a percentage or flat fee amount per item. For example, “franchisor receives a rebates of $300 for each oven purchased.”
With such resources as the FTC Compliance Guide, FTC Frequently Asked Questions and NASAA Disclosure Guidelines, it would seem like there should be nothing up for debate when it comes to FDD drafting. After attending this workshop, however, it is clear that there are always new tips to learn.