For a franchisor with a December 31 fiscal year, now is the time to start preparing to renew their franchise documentation. The FTC rules require that the franchise disclosure document (“FDD”) must be updated within 120 days of the expiration of a franchisor’s fiscal year. Registration states, such as New York, have an identical requirement. As you prepare to do so, that process presents an opportunity to review and improve your franchise documentation, particularly the franchise agreement.
A review of the FDD often reveals opportunities to make changes that save money, increase return and minimize risk. Over the past several years, developments in the law and in business, particularly the technology associated with doing business, require franchisors to consider significantly revising and enhancing their franchise agreements. Some of the more interesting concepts that should be considered include:
• Social Media: It is imperative that the franchisor implements a social media policy to closely monitor and control franchisee use of Twitter, Facebook, LinkedIn and other platforms that are being used more frequently in business. The franchisor’s brand and intellectual property need to be protected. The standard clauses intended to address the use of proprietary information in conventional advertising are inadequate.
• Insurance: Clauses should be scrutinized to be certain that franchisees are required to maintain employment practices insurance, protecting against acts of employees (such as sexual harassment) in an increasingly litigious workplace, as well as other supplemental coverage such as business interruption insurance.
• Remedies and protections: The agreement should be reviewed in the light of worst case scenarios. What will the franchisor be able to do to protect itself in the event a franchisee utterly fails in its obligations? For instance, a franchisor may want to have a security interest in the franchisee’s assets, including furniture, fixtures and equipment and a collateral assignment of the franchisee’s lease.
• Territorial exclusivity: The franchisor must ensure that the franchise agreement is crystal clear as to the territorial rights granted to franchisees. Does the agreement expressly provide that the franchisee is granted only the limited right to develop a franchise within a prescribed area and that the franchisor reserves for itself (or others) the right to develop other revenue streams via non-traditional locations and alternative distribution channels? These non-traditional locations may include campuses, malls, sports arenas and airports. Alternative distribution channels enable the franchisor to sell into the franchisee’s territory through the internet, mail order sales, and other means.
• Addendums and changes in practice: Has the system deviated in practice from something that was once required in the original franchise agreement? The franchisor should examine the system as it operates on the ground and make certain that all aspects of the franchise agreement are being adhered to. If not, practices should be examined and a determination should be made as to whether the system should be brought back in line within the franchise agreement’s original guidelines, or, instead, if the franchise agreement should be revised to accommodate the new reality.
Obviously, the above is just the tip of the proverbial iceberg. Any franchisor reviewing his franchise agreement with knowledgeable franchise counsel will find areas that require refinement, removal or enhancement. The end result is a modernized agreement that keeps up with the reality of managing a franchise system in a constantly evolving marketplace.