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2020: The Year of the FDDetour

By Lane Fisher, Partner, FisherZucker

 

2020: The Year of the FDDetour

If you are responsible for or dependent upon a Franchise Disclosure Document (FDD) to market franchises and you’re still using a 2020 FDD containing only information through the end of 2019, you may be a little late to the party. 2020 was an atypical year for most franchise systems. While some franchisors in essential businesses were beneficiaries of higher sales, the majority of franchise systems were “shuttered” for some part of 2020, and for many, operating in compliance with occupancy restrictions and COVID protocols has affected profitability and unit performance in a way no one could have anticipated. Now a week into a second shutdown, even the best recovery story may be subject to yet another interruption, which may be more profound depending on region.

For months franchisors have been describing a “pivot” in their business model, or more efficient adaptation, that has helped them fare better during the pandemic. The economic impact of these changes can only be captured in 2020 data, and for many, the most recent data is the best. The only way to discuss 2020 data – be it good or bad – is to include it in an amended FDD containing an updated Item 19. Amendments have substantial state filing fees, require you to update other Items and must include unaudited interim financials dated within 90 days of the amendment.

Whether your motivations are defensive (to avoid potential claims), or offensive (to highlight your recovery or better financial performance), updating your FDD should be on your radar. Even if you’re in a holding pattern now, every franchisor should be thinking about how they’ll tell the story in their 2021 FDD, which for most is due in April 2021.

At least three registration states (California, Washington and Maryland) made a practice of requiring 2020 data as a condition of getting registered, unless you could demonstrate that unit performance remained unchanged. In registration states, there are additional statutory remedies available, besides state common law fraud claims, for selling under a “stale” document.

Even if you started the registration cycle with a compliant FDD, the issue is whether the financial performance incident to these closures were material to your offering, and potentially required an amendment of the FDD. If you awarded no franchises in 2020, or your systemwide financial performance was unaffected, then it’s likely a non-issue. For everyone else, it’ll be a function of how much you may have changed your model, recovered on a go-forward basis and how quickly you recapture historical financial levels.

Many predict that, in every dispute involving a deal signed in 2020, counsel will scrutinize the economic status of the franchisor and franchisees and compare that to what was disclosed. If your units have underperformed in 2020, then the only way to tag franchisees with such knowledge is through an amended FDD. Otherwise, prospects will have nothing to rely on but the verbal representations and characterizations made by the franchisor’s agents and employees, existing franchisees or stale FDD information.

Many franchisors were well on the “road to recovery” and had a story to tell before things closed again. Many franchisors amended their FDD early on in 2020 in order to capture the metrics around their particular recovery. While any comeback story is now further complicated by a second shutdown, I suspect that the way to deal with it will remain the same: demonstrate your road to reaching historical levels of gross sales. I would not be surprised if franchisors with more than 10 units tried to organize units geographically to isolate the “affected” units, while still demonstrating a recovery in less restrictive states, like they did in 2008 to isolate California, Florida and Nevada, among other places.

We recognize that the answer isn’t always (or ever) black and white, and expect to see the brightest minds in franchising adopt new approaches to telling their story. To provide a venue for this collaboration, my firm and the sponsors listed below have come together to host a virtual session on December 17 at 3PM on 2020: The Year of the FDDetour. FisherZucker lawyers, select suppliers and seasoned franchise executives will offer perspective on reconciling old and new numbers, extracting trends and other leading indicators of rehabilitation and recovery, and putting them to use in the FDD and sales process.

Because these remain challenging times for most, we are not charging any fee to participate. However, because we’ll be soliciting experts from other franchise C-suites to work with you, please take your commitment to participate seriously and come prepared.

If you’re interested, please click here to register.

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