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Annual Expenses for Franchisors

Question:

If I want to franchise my concept, I understand that I need to have federally registered trademarks, my systems documented, and my franchise disclosure document prepared, among other things. Are there ongoing expenses to franchising?

Answer:

Yes, the Federal Trade Commission’s Franchise Rule requires annual updates.

The Franchise Disclosure Document is a snap shot of the franchise company and system on December 31 of the preceding year. The FTC’s Franchise Rule requires many disclosures to be based upon information from December 31 from the previous year. For example, the FTC Rule requires the disclosure of the status of your franchise system with the number of company stores and franchises that exist in the system at the end of each of the preceding three fiscal years and what happened to the company stores and franchises in the previous year. How many stores did you open, close, transfer, etc. in the previous year? This information shows a prospective franchisee how the system has grown or contracted over the previous three years. Since the FTC Rule requires the disclosure of time sensitive information, such as the status of the franchise system described above, the franchise system must update its FDD each year.

This FDD update process will address the changes to the system from the previous fiscal year, such as changes in franchise company management, changes in fee structures or incentive programs, revisions in the initial cost estimates for opening a franchise, changes in the products and services being offered by franchisees, and changes to the franchise system that occurred in the previous year, among other things. The FDD updating process is also an excellent opportunity to make changes to the franchise agreement, area development agreement or other documents that may be necessary due to recent court cases. Finally, the FDD updating process is an excellent opportunity for the franchisor to make changes to its agreements because the franchisor simply wants to do business with its franchisees in a different manner. In short, the annual FDD updates are an excellent opportunity to review the franchise system and how it does business and make any desired changes.

Another significant annual expense is the franchise company audit. The FTC Rule requires the franchise company to disclose its audited financial statements for the previous three fiscal years. The audited financial statement requirement is an annual expense for which you must plan. It is important that the franchise company use an accounting firm that is familiar with franchising and auditing franchise companies. These audits become publicly disclosed with the franchise company’s FDD.

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