New NASAA FDD State Cover Pages for 2020

When you update your FDD for 2020, the first few pages of your will look very different than they have in the past.  NASAA has updated the state cover page requirements.  NASAA updated the cover pages with the intention of better helping franchisees understand and use the FDD.

Below are summaries of the changes to the 2020 state cover pages.  As you familiarize yourself with the changes, the new state cover pages may help you to more effectively and efficiently answer prospective franchisees’ questions about the content of your FDD.

Serving as a Guide to the FDD

Three new sections in the cover pages guide the prospective franchisee through your FDD, the franchise relationship generally, and the risks that state regulators may have identified with your particular franchise offering.

First, there is a new page titled “How to Use This Franchise Disclosure Document.”  This section provides a list of common questions that prospective franchisees have about buying a franchise and directs them to the Item in the FDD that provides the corresponding answer.  In a way, this new section functions as an index to the FDD.

How to Use This Franchise Disclosure Document

Here are some questions you may be asking about buying a franchise and tips on how to find more information:

             QUESTION                                     WHERE TO FIND INFORMATION
How much can I earn? Item 19 may give you information about outlet sales, costs, profits or losses. You should also try to obtain this information from others, like current and former franchisees. You can find their names and contact information in Item 20 or Exhibit [ ].
How much will I need to invest? Items 5 and 6 list fees you will be paying to the franchisor or at the franchisor’s direction. Item 7 lists the initial investment to open. Item 8 describes the suppliers you must use.
Does the franchisor have the financial ability to provide support to my business? Item 21 or Exhibit [ ] includes financial statements. Review these statements carefully.
Is the franchise system stable, growing, or shrinking? Item 20 summarizes the recent history of the number of company-owned and franchised outlets.
Will my business be the only [XYZ] business in my area? Item 12 and the “territory” provisions in the franchise agreement describe whether the franchisor and other franchisees can compete with you.
Does the franchisor have a troubled legal history? Items 3 and 4 tell you whether the franchisor or its management have been involved in material litigation or bankruptcy proceedings.
What’s it like to be [an XYZ] franchisee? Item 20 or Exhibit [ ] lists current and former franchisees. You can contact them to ask about their experiences.
What else should I know? These questions are only a few things you should look for. Review all 23 Items and all Exhibits in this disclosure document to better understand this franchise opportunity. See the table of contents.

Second, there is a new page titled “What you Need to Know About Franchising Generally.”  This page summarizes your key rights as a franchisor and key obligations of the franchisee.  This document forecasts the control that you will have over the brand and franchising process.

What You Need To Know About Franchising Generally

Continuing responsibility to pay fees. You may have to pay royalties and other fees even if you are losing money.

Business model can change. The franchise agreement may allow the franchisor to change its manuals and business model without your consent. These changes may require you to make additional investments in your franchise business or may harm your franchise business.

Supplier restrictions. You may have to buy or lease items from the franchisor or a limited group of suppliers the franchisor designates. These items may be more expensive than similar items you could buy on your own.

Operating restrictions. The franchise agreement may prohibit you from operating a similar business during the term of the franchise. There are usually other restrictions. Some examples may include controlling your location, your access to customers, what you sell, how you market, and your hours of operation.

Competition from franchisor. Even if the franchise agreement grants you a territory, the franchisor may have the right to compete with you in your territory.

Renewal. Your franchise agreement may not permit you to renew. Even if it does, you may have to sign a new agreement with different terms and conditions in order to continue to operate your franchise business.

When your franchise ends. The franchise agreement may prohibit you from operating a similar business after your franchise ends even if you still have obligations to your landlord or other creditors.

Some States Require Registration

Your state may have a franchise law, or other law, that requires franchisors to register before offering or selling franchises in the state. Registration does not mean that the state recommends the franchise or has verified the information in this document. To find out if your state has a registration requirement, or to contact your state, use the agency information in Exhibit [ ].

Your state also may have laws that require special disclosures or amendments be made to your franchise agreement. If so, you should check the State Specific Addenda. See the Table of Contents for the location of the State Specific Addenda.

Third, the cover pages provide space for you to list the risk factors that registration or filing states have required you to identify.  If state regulators have concerns about the finances of the franchisor or terms of the franchise agreement, this cover page provides space for those risks to be highlighted.

Special Risks to Consider About This Franchise

Certain states require that the following risk(s) be highlighted:

1.    Out-of-State Dispute Resolution. The franchise agreement requires you to resolve disputes with the franchisor by mediation, arbitration and/or litigation only in [State]. Out-of-state mediation, arbitration, or litigation may force you to accept a less favorable settlement for disputes. It may also cost more to mediate, arbitrate, or litigate with the franchisor in [State] than in your own state.

Certain states may require other risks to be highlighted. Check the “State Specific Addenda” (if any) to see whether your state requires other risks to be highlighted.

Moving the State Effective Dates

Certain states, including California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin, require the FDD to be registered or filed in the state.  Each state will process the FDD and approve it for use beginning on a specific date, known as the “effective date.”  The cover pages provide a list of the effective dates so that a prospective franchisee can verify that he or she has an received an FDD that has been properly registered or filed in his or her state.

The 2020 changes move the list of state effective dates from the front of the FDD to the very back.  Now the only content after the list of state effective dates are the receipt pages from Item 23.  Additionally, prospective franchisees are also reminded that other types of state laws, like the sale of business opportunity or seller assisted marketing, may affect the sale of franchises in their state.

If you have questions or concerns about how the new state cove pages will affect your 2020 FDD or its filing or registration in any state, you should contact a franchise attorney.