New Required Franchise Disclosure Document Cover Page(s)
Beginning January 1, a new cover page, or series of pages, is required for Franchise Disclosure Documents used in the United States. The change is currently in effect for would be franchisors that file an initial application and is effective for existing franchisors when they next file an amendment or renewal application.
The new requirement begins with a cover page similar to the one previously required, but then requires that three specific pages following the initial page. These pages are titled “How to Use This Franchise Disclosure Document,” “What You Need to Know About Franchising Generally,” and “Special Risks to Consider About This Franchise.”
The new pages point prospective franchisees to questions they should be asking about buying a franchise, and address risks that are inherent in most franchise relationships. Some franchisors have expressed concern about the cautions being given to prospective franchisees. The fear among some franchisors is that they will scare away prospects. However, we look at it very differently and think our clients will find these pages very helpful to them. To the extent they scare prospects, remember that your competitors will be using the same cover pages that you will be using, and so no prospect will reject your franchise in favor of another one as a result of these disclosures. While it is possible that a prospect will decide not to purchase any franchise at all as a result of these cautions, such as the fact that they may have to pay royalties even when they are losing money, or cannot operate a competing business, or may have to purchase items from you or from suppliers you designate, do you really want franchisees in your system who are not aware of these requirements? In those circumstances, they may help you dodge a bullet! Even more importantly, the fact that these and other requirements will be disclosed to franchisees at the front of the FDD will make it very difficult for a franchisee to later make a claim against a franchisor on the basis that they did not understand they were subject to these requirements. Thus, we look at these disclosures as providing more protection to franchisors against franchisees who fail because of their inability or refusal to follow the requirements of the franchise agreement.
If you are not familiar with the new cover page requirements, the following link to a post on our website for franchisors will give you more details about the requirements. https://franchising.larkinhoffman.com/blog/new-fdd-state-cover-sheets-and-state-effective-dates-page/