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As most people know, franchises are governed by Federal Law. (see 16 CFR 436 et seq.) Franchisors comply with that law by providing the Federal Disclosure Document which must be updated annually within 120 days of the end of the calendar year (see 16 CFR 436.7), and with quarterly interim updates on certain aspects.
However, the franchise consultants and franchise development teams are super familiar with the “State Registration traps”. Each year, we hear of many well respected Brands that go “dark” from the sales process in various states. So we wondered how this affects Brands nationwide each year.
You see, each state may have a different timeline that they must be registered for renewal annually. However, there are twelve states that have renewal expirations that are not 120 days after the end of the fiscal year like the Federal Reserve Rule. Hawaii Department of Commerce and Consumer Affairs Franchise Rule requires that you renewal your Franchise Disclosure Document within 90 days after the fiscal year end. Whereas, California Department of Business Oversight oversees the Franchise Investment law which states that the registration expires 110 days after the fiscal year end. However, California has an additional hurdle for Franchisors, the renewal must occur at minimum 15 days prior to the expiration date, which in essence makes the current years registration worthless 95 days after the fiscal year end.
The following states, 10 states in total, expire one year from the effective date: Florida, Indiana, Maryland, Michigan, North Dakota, South Dakota, Utah, Virginia, Washington, and Wisconsin.
However, only 6 states allow you to file the renewal up to the expiration date. The other four states, either have a deadline of 15 days prior to expiration, 30 days prior to expiration, or require in essence two filings per year.So with all this craziness going on with the annual renewals, it is inevitable that some deadlines would be missed. The overwhelmingly majority of the time, Franchisor’s go dark due to delayed audited financials from the Franchisor’s CPA or accounting firm.
Going dark, is when the Franchisor misses their renewal deadline and their state registration is terminated. Once terminated, a Franchisor must re-register, which holds no automatic enforcement provisions under the state statutes. Thus a franchise team could have to wait an additional 21 days at minimum to months to start awarding franchises in that state again.
When at an annual convention recently with dozens and dozens of franchisors present, I asked the question to several of them about the sales impact of “going dark” in a state. I specifically asked if they lost franchisees by going dark, or had they ever gained franchisees simply by hitting their automatic renewal dates, and thus not going dark. The response was shocking. The majority who were Franchisors for several years, clearly indicated that they had lost franchisees to competitors if they went “dark” that year in a particular state. Additionally, they had other years when they gained franchisees from competitors and were “quick sales” by not being “dark” after the registration renewal time frame.
So with registration state registration and renewals playing such an intregal role in the sales and franchise awarding process or growth of a franchisor, what are some of the steps you can take to ensure your Franchise system achieves the highest impact of franchise sales?
- Start talking to your franchise Attorney regarding Registration States early; at least 3 months prior to each states renewal date.
- The last week of your fiscal year, start updating your Item 20 tables’ numbers.
- Begin the audit of your franchise companies financials the week after your fiscal year end.
- Hold an executive level meeting the first month after your fiscal year end to review the FDD for any modifications you want made for this year’s Disclosure Document. Share this information with your Franchise Attorney as soon as possible.
- Give your CPA or Accounting team a deadline of 45 days after fiscal year end to have the audit finalized.
- Spend additionally marketing budget in the states where you successfully got renewed timely. This will help you capture some franchisee prospects that had been looking at a different brand that went “dark” in their sales process.
With so much on the line, and with the average cost of a franchise being awarded costing of $8,000, this is one area in your system that can either be an advantage or a disadvantage.