Do I have to re-disclosure all franchisee prospects that I had disclosed prior to franchise renewal?

Asked over 2 years ago - Chicago, IL

I'm a small franchisor in Illinois. My question is if I have to re-disclosure and wait the mandatory 14 calendar days for all franchise prospects that were disclosed prior to the renewal of my FDD, i.e. they were disclosed and signed a receipt for the FDD from last year.

Your help is great appreciated.

Attorney answers (5)

  1. Kenneth F. Darrow

    Contributor Level 9

    1

    Lawyer agrees

    Answered . Ms.Lenhard succinctly summarizes your obligations. I would suggest that the new year end audited financial statements constitute a material change and for that reason you should most certainly consult with experienced franchise counsel to advise you on how to proceed. Navigating the rules on disclosure can be confusing and an inadvertant or uninformed mistake can have significant ramifications.

  2. Melissa D. Lenhard

    Contributor Level 13

    1

    Lawyer agrees

    1

    Answered . No matter how large or small a franchisor you are, it is imperative that you retain the services of a competent franchise attorney to navigate the difficult and intricate area of franchise law. I would hope that you have had legal counsel prepare your franchise disclosure document and assist in the registration of your franchise with the State of Illinois. Assuming that is the case, you should consult your attorney regarding the provision of disclosure documents to prospective franchisees.

    Nonetheless, you should at least consult the revised FTC Franchise Rule as well as the Illinois Franchise Disclosure Act. If you read through their provisions, you will find that you must re-issue a revised FDD to any prospective franchisee that has previously been issued an FDD if the new FDD contains any material changes. Absent any material change, though, you are not required to proactively furnish a copy of the new FDD to any prospect previously provided with the out-dated disclosure document. However, in the event a prospective franchisee requests the most recent update, you must provide it to them.

    While I hope this answer is helpful to you, I strongly recommend that you hire an attorney experienced in franchise law to assist you on an on-going basis.

    I wish you good luck.

    This response does not create an attorney-client relationship and is not intended to provide legal advice for your... more
  3. Kevin Brendan Murphy

    Pro

    Contributor Level 15

    Answered . As a franchise attorney, I agree with the other attorney answers. The only additional comment is that you carefully consider (with counsel) the definition of "material change."

    In general, something is considered "material" if a reasonable prospective franchisee would consider it in making a decision to buy or not buy your franchise. With the updated financial statements, for example, were they significantly negative, positive or no change from the prior financials.

    The same analysis applies to all other changes associated with the renewal. These are not issues you should try to answer yourself. Best to consult with a qualified franchise attorney for advice.

    From a marketing perspective, there is a good way to put a very positive spin on re-disclosing to existing franchise prospects that should enhance interest.

    Kevin B. Murphy, B.S., M.B.A., J.D.
    Attorney at Law & Franchise Expert
    Director of Operations - Mr. Franchise
    FRANCHISE FOUNDATIONS APC

  4. Nancy L. Lanard

    Contributor Level 13

    Answered . I agree with my colleagues and would strongly recommend you retain competent franchise counsel to advise you. You should definitely redisclose to the prospective franchisees since changes to the franchise agreement, audited financials and other new information contained in your updated FDD will likely require you to do so under both federal and state laws.

    The best advice is to consult with experienced franchise counsel.

    If you found this reply helpful, please mark it as a best answer.

    This response does not create an attorney-client relationship and is not intended to provide legal advice for your... more
  5. Robert Emerson Vinson Jr

    Contributor Level 3

    Answered . The safest rule for all franchisors is "when in doubt, disclose" -- or, in this case, redisclose. Otherwise, you may be handing your franchisees an easy claim that could be brought against you a year or more in the future. Remember that the franchisor typically has the burden of proof to demonstrate that it complied with all applicable disclosure laws. It is theoretically possible that your annual updates to your FDD could be non-material changes. But, why risk the chance that a judge or franchise regulator could reach the opposite conclusion -- especially when this risk can be completely eliminated by re-disclosure and waiting the applicable cooling-off period(s)?

    By the way, in addition to the FTC Franchise Rule and the Illinois franchise diclosure law mentioned in other responses, applicable disclosure law will include the franchise disclosure laws (if any) of the state(s) where your franchisee prospects reside, and the state(s) where the prospective franchised businesses will be located.

    Regards,
    Rob Vinson
    Vinson Franchise Law Firm
    www.franchiselaw.net

    This response provides general information only. Nothing included in this response should be construed as... more

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