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

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

The Best Lawyers in South Africa™ 2023


by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag

Could Reign Supreme End with the Queen?


by Sara Collin

Canada is revisiting the notion of abolishing the monarchy after Queen Elizabeth II’s passing, but many Canadians and lawmakers are questioning if Canada could, should and would follow through.

Teacup on saucer over image of Queen's eye

Famous Songs Unprotected by Copyright Could Mean Royalties for Some


by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

IN PARTNERSHIP

2022: Another Banner Year


by John Fields

Block O’Toole & Murphy continues to secure some of New York’s highest results for personal injury matters.

Three men in business suits standing in office

Announcing the 2023 The Best Lawyers in Canada Honorees


by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Thirteen Years of Excellence


by Best Lawyers

For the 13th consecutive year, “Best Law Firms” has awarded the most elite and talented law firms across the country through a thorough and trusted data review process.

Red, white and blue pipes and writing on black background

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Choosing a Title Company: What a Seller Should Expect


by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

Caffeine Overload and DUI Tests


by Daniel Taylor

While it might come as a surprise, the over-consumption of caffeine could trigger a false positive on a breathalyzer test.

Can Caffeine Cause You to Fail DUI Test?

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

Announcing The Best Lawyers in Australia™ 2023


by Best Lawyers

The results include an elite field of top lawyers and firms from Australia.

The Best Lawyers in Australia™ 2023

Announcing The Best Lawyers in Germany™ 2023


by Best Lawyers

The results include an elite field of top lawyers and firms from Germany.

Black, red and yellow stripes