COVID-19 and Item 19: How the Pandemic Might Impact Upcoming Franchise Disclosure Documents

In a few months, many franchisors will begin working on next year’s Franchise Disclosure Document, a comprehensive record of information about the organization that is shared with franchise prospects. The FDD contains several hundreds of pages of franchise information, which includes 23 sections, or items, and numerous additional exhibits.

As a recently posted article in Forbes points out, “Due to the negative impact on many industries caused by the Covid-19 pandemic, the information shared in the 2020 FDD will be significantly different from previous years. What the FDD will look like and how it should be interpreted will be one of the big questions in the franchise community over the next year.”

Several sections of the FDD will likely be impacted, including what many consider to be the most important section, Item 19. 

“Franchisors in the restaurant, hotel, beauty and fitness industries have been profoundly impacted," the article said. "A lot of these locations were forced to close for several months, and therefore will not have a full year of earnings. Even though some restaurants remained open for carryout or delivery or have reopened their dining rooms at partial capacity, their sales numbers took a substantial hit over that time and do not represent the normal volume of sales that would be expected. This is going to create a complex set of challenges that franchisors have never faced when putting together Item 19 of the FDD.”

Since the pandemic may have forced some franchise locations to close while delaying plans for opening new units, the brand’s Item 20, which outlines the number of operating units, will be significantly different than previous years. Item 21 presents the audited financial statements for the franchisor for the past three years, and there is no doubt 2020 will prove to be an outlier. 

Much of the language in a brand’s FDD will also likely need to be altered to better reflect a post-pandemic landscape, the article notes. Moving forward, franchisors will need to work hard to update their FDD and meet the needs of prospective franchisees. 

“These are new and unexpected challenges and there is no precedent for handling the challenges that the upcoming FDD will present," the article continued. "One option is to essentially mark an asterisk next to everything in 2020 and recognize the data is an outlier. In Item 19, they could share the 2018, 2019 and 2020 numbers, thereby showing the norm of the previous years and then disclosing the unusual year of 2020. Either way, franchisors work hard to present a linear progression of growth and stability for the benefit of their business and the disclosure. That linear path will likely be shattered in 2020.”

To read the full Forbes article, click here.