If you want to make a legal franchise sale, you must follow certain basic franchise sales steps.
Those steps are shown in the picture below.
We will move through each step, noting the potential compliance pitfall.
1. You must have a current Franchise Disclosure Document (FDD). It must be in the format specified under the FTC franchise rule and state laws.
a. The FDD may be paper or electronic.
In either case, it must be a "single document." In other words, for example, the franchise agreement and the franchisor's financials must be integrated into the FDD, and may not be free-standing.
If the FDD is electronic, it may contain scroll bars, search features, internal links and limited external links, but it must not contain multi-media features such as audio, video, animation, pop-up screens or other external links.
b. The FDD must be current.
This generally means that it must have been updated within 120 days after the franchisor's most recent fiscal year end, and, in addition, must have been updated promptly after the occurrence of any "material change" (anything such as a lawsuit, bankruptcy, fee increase, cost increase, financial reversal, or other change that might be significant to a prospect).
For example, if the franchisor has a fiscal year ending December 31, the FDD must be updated no later than April 30 (120 days after December 31). If it is not, you must not offer or sell the franchise.
You should check with the franchisor's lawyer or compliance manager before using any FDD that might be outdated because there are exceptions that may apply. For example, you can use an FDD that has not been updated after a "material change" has occurred when only the more lenient updating requirements in the FTC franchise rule apply.
Even if you are permitted to use the previous FDD, you may be required to re-disclose the prospect with the updated FDD before you sell a franchise.
Always check with the franchisor's lawyer or compliance manager before proceeding in this type of situation, giving an outdated FDD and then re-disclosing with the correctly updated FDD.
(This was the first post in a series of 11 posts on making compliant franchise sales.)
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Franchisors should check their sales administration & compliance steps against the franchise sales process outlined by Warren Lewis.