The biggest FDD-related changes that franchisors should anticipate in 2019.
Each spring, franchisors are given the opportunity to make a few changes to their franchise disclosure document, impacting their entire franchise system. So, what’s expected to change in 2019? 1851 connected with two prominent franchise legal players to find out.
Having worked at Manning Fulton for more than two decades, Ritchie Taylor has watched the industry change drastically, including witnessing the evolution FDD into what it is today. Similarly, Marisa Faunce started working in franchise litigation immediately out of college for PlaveKoch. She stayed in litigation for five years before gradually moving over into corporate work. Now, she represents franchisors on the transactional side and is also a trademark attorney.
With nearly 50 years of combined industry knowledge, the two shared their thoughts on the top five FDD trends they expect to see in 2019.
More Detailed Item 19s
Thanks to the internet, franchisees are much more knowledgeable than they were 20 years ago. Information about a brand is exponentially easier for a potential candidate to find, meaning franchisors have to add an extra layer of protection to ensure they’re keeping up with societal demands.
“Franchisees have become more sophisticated,” Taylor said. “They want to know how the brand performs in the marketplace before they agree to sign on. Because of this, franchisors have become comfortable providing their Item 19. Franchisors need to understand that their financial performance is not a liability, it’s actually protecting them. I expect to see franchisors implementing a more detailed Item 19 this year.”
Disclosing Detailed Franchise Fees
Franchise fees are the initial payments that a franchisee makes to a franchisor when joining the system. Previously, franchisors could include these franchise fees in their overall revenue. However, beginning this year, franchisors will have to begin recognizing their revenue under new rules.
“If you’re a franchisor, reach out to your accounting firm and review the revenue recognition policy when it comes to your initial franchise fees,” Faunce said. “Make sure that you include services like site selection and training, and that you have looked at your FDD closely to recognize those upfront costs. Many franchisors loop in their accounting firms, but only when they’re in the final review process. This year especially, they need to ensure that they’re including their accounting teams much earlier in the process.”
The Addition of Social Media Requirements
Another change Taylor anticipates in FDDs comes in response to the evolution of social media and the increased importance of a brand’s online presence.
“We’re continuing to see franchisors back away from social media because while they want to have a presence, it’s hard to control,” he said. “As a result, a lot of franchisors have tried to control their entire system’s social media presence from corporate headquarters. Instead of relying solely on the corporate team to protect a brand’s image, franchisors need to start providing franchisees with social media guidelines so that there’s consistency. In 2019, brands are trying to look at value-added services, like social media, and factoring that fee into the FDD.”
Increased Scrutiny Regarding Anti-Poaching Clauses
Over the last year, anti-poaching clauses have been a hot topic. These clauses forbid franchisees from hiring workers from another franchisee within the same system. While the goal of anti-poaching clauses, according to the IFA, is to protect those who have trained the workers, others see it as the brand’s way of pigeonholing its employees and reducing their chances at getting a better title or higher wage.
“In the last year, we’ve seen a push by several states to hold franchisors accountable for anti-poaching clauses in their franchise agreements,” Faunce said. “Some states’ attorneys general feel like that’s anti-competitive behavior. Franchisors and franchisees should start carefully looking at anti-poaching clauses and have a serious discussion with their attorneys to discuss their options.”
Higher Data Security Standards
Data breaches are one of the quickest ways for a brand to scar its reputation with consumers. The moment a consumer falls victim to an attack or feels their information has been put at risk, they’re unlikely to return. Because of this, it’s vital for franchisors to protect themselves.
“There’s been a lot of media coverage on data breaches and data privacy lately,” Faunce said. “As a franchisor, this would be a good time to look at your FDD to review PCI compliance policies and data security, and even consider hiring outside cybersecurity experts. With the Starwood data breach that just happened in the last year, among others, this factor has been top of mind for franchisors and is something that they should really consider looking at closely this year.”