Insight

Updating Your FDD – What to Consider

Updating Your FDD – What to Consider

Lynne M. Hanson

Lynne M. Hanson

April 8, 2021 11:44 AM

COVID restrictions changed many business models in 2020. How did your franchise system change during 2020? Consider the conversation that your salespeople will want to have with prospective franchisees this year about how your system adapted to the restrictions that resulted from the pandemic. Not addressing those changes in your Franchise Disclosure Document ("FDD") could prevent those conversations from taking place and deter a would-be buyer from becoming your next franchisee. Many businesses changed their physical design or layout, added outdoor dining areas or redesigned indoor spaces, changed menus to accommodate delivery services and take-out, offered curbside pick-up or additional drive-thru lanes, added plexiglass dividers, and other safety measures to accommodate social distancing rules. Some systems are incorporating these changes into permanent features. Consumer demand changed during 2020 as well, and some of those changes could be permanent. Depending on what changes you expect to see this year and beyond, this could require changes to the disclosures in your FDD related to the description of the goods and services offered, initial investment costs, and others. Training and support of franchisees may be an area where changes made during 2020 will become standard in the future. Many franchisors started holding group calls and video conferences with franchisees to discuss coping with government restrictions, loan applications, negotiating changes to leases, new sanitation measures, and other things that business owners were facing. In some systems, those group calls have become a regular feature of franchisees' support as they navigate the lifting of restrictions on the retail sector. Be sure to add new methods of support to your FDD disclosures. Updating Financial Performance RepresentationsFinancial performance representations ("FPR") made in 2021 using sales data for 2020 may show significantly less revenue than in 2019 due to COVID restrictions. In addition, some franchised businesses closed temporarily in 2020 but may be planning to re-open in 2021. Franchisors should keep in mind that they are required to disclose "material" changes in the franchise system as they occur, including a material decrease in the number of outlets. Many franchisors will be disclosing FPR data from 2019 side-by-side with 2020 data to enable salespeople to talk about the results of a 'normal' year as compared to 2020. All disclosures in Item 19 require a "reasonable basis," and you must have written substantiation for the data presented. Some franchisors may want to present data by state or by region, given that some areas of the country were more restricted than others. If this makes sense for your system, a supplemental FPR for prospects looking to develop a business in a particular state or region might be the most effective way to disclose that information. Practical Expedient Makes Recognition of Initial Franchise Fees Easier In January 2021, the Financial Accounting Standards Board issued a "practical expedient" whereby a privately-held franchisor can consolidate six of its pre-opening obligations into a single performance obligation when it applies FASB 606 to recognize revenue from the initial franchise fee. The six pre-opening services are:
  1. site selection assistance;
  2. assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, engineering services, and lease negotiation;
  3. training;
  4. preparing and distributing operations manuals;
  5. bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes or regulations affecting the franchisee's business; and
  6. inspection, testing, and other quality control programs.
While this practical expedient will allow franchisors to recognize revenue related to these services when they are performed, thus simplifying Step 2 of the process in determining how much revenue can be recognized, it does not impact Step 4, which requires franchisors to determine the value of those services to conclude how much revenue can be recognized. Franchisors cannot assume that the value of the preopening services equals the amount of the initial franchise fee. To learn more, watch the recap video of our most recent Women’s Franchise Network event. If you have further questions regarding your FDD’s, please contact Lynne Hanson, co-chair of the Franchise and Distribution Group. If you have questions regarding your FPRs, please contact Angela Newell, National Assurance Partner at BDO USA, LLP.

Related Articles

Can Your Option to Purchase Get Lost in a Franchise Agreement?


by Alicia Hill and Benjamin Caddaye

With the changing of a contract in a franchise agreement, certain rights you thought you were entitled to might get lost in translation.

Franchise Agreements and Purchase Options

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

Best Lawyers Expands 2024 Brazilian Awards


by Best Lawyers

Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Brazil™ and the first edition of Best Lawyers: Ones to Watch in Brazil™.

Image of Brazil city and water from sky

The Best Lawyers in Mexico Celebrates a Milestone Year


by Best Lawyers

Best Lawyers is excited to announce the 15th edition of The Best Lawyers in Mexico™ and the second edition of Best Lawyers: Ones to Watch in Mexico™ for 2024.

Sky view of Mexico city scape

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

Presenting the 2024 Best Lawyers Family Law Legal Guide


by Best Lawyers

The 2024 Best Lawyers Family Law Legal Guide is now live and includes recognitions for all Best Lawyers family law awards. Read below and explore the legal guide.

Man entering home and hugging two children in doorway

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country

Canada Makes First Foray Into AI Regulation


by Sara Collin

As Artificial Intelligence continues to rise in use and popularity, many countries are working to ensure proper regulation. Canada has just made its first foray into AI regulation.

People standing in front of large, green pixelated image of buildings

Commingling Assets


by Tamires M. Oliveira

Commingling alone does not automatically turn an otherwise immune asset into an asset subject to marital distribution as explained by one family law lawyer.

Toy house and figure of married couple standing on stacks of coins

How Much Is a Lawyer Consultation Fee?


by Best Lawyers

Best Lawyers breaks down the key differences between consultation and retainer fees when hiring an attorney, a crucial first step in the legal process.

Client consulting with lawyer wearing a suit

The Hague Convention and International Custody Battles


by Alexandra Goldstein

One family law lawyer explains how Joe Jonas and Sophie Turner’s celebrity divorce brings The Hague Convention treaty and international child custody battles into the spotlight.

Man and woman celebrities wearing black and standing for photo

Presenting the 2024 Best Lawyers Employment and Workers’ Compensation Legal Guide


by Best Lawyers

The 2024 Best Lawyers Employment and Workers' Compensation Legal Guide provides exclusive access to all Best Lawyers awards in related practice areas. Read below and explore the legal guide.

Illustration of several men and women in shades of orange and teal

New York Passes 9/11 Notice Act


by Gregory Sirico

Best Lawyers highlights the newly enacted 9/11 Notice Act, which seeks to find individuals eligible for medical care coverage under different federal programs.

Firefighter stands with their back turned with flames in the background

Filing For Divorce in North Carolina


by Melody J. King

Family law lawyer Melody King answers some of the most important questions individuals may have about filing for divorce in North Carolina.

Illustration of man and woman on paper that has been torn apart