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Tips for California Franchisors Preparing for 2013 Renewal

As franchised businesses are aware, franchises can only be sold in California pursuant to an “Order” (i.e. permit) issued by the California Department of Corporations (the “DOC”). In addition, this Order expires 110 days after the Franchisor’s fiscal year end (which for calendar year companies means April 22, 2013) and must be renewed every year. So long as the franchise renewal application if filed at least 15 business days before the registration period expires (which for calendar year companies means on or before April 1) the franchise registration is automatically renewed for another 12 month period unless the DOC finds a problem which requires delaying the registration renewal. If a franchisor misses the April 1 renewal filing deadline, then the filing goes to the DOC’s “To Be Reviewed” filing bin and completion of such review may extend long past the franchise expiration date, in which case the franchisor must temporarily cease selling franchises in California until a new registration Order is issued.

To assist franchisors in preparing for the franchise renewal process, I have listed a few tips I have picked-up over the years to help facilitate a timely and effective franchise renewal filing this year.

1)  Establish your Target Dates and Stick with them. As discussed above, establish your renewal filing deadline (for example April 1for calendar year franchisors) and work backwards from there with your franchise team, franchise attorney and accountant to allow for necessary prep time. Remember accountants start to get busy with tax stuff in mid-February so make sure you’re audit is on their “to-do” list early. The franchisor can start compiling updated information for the Franchise Disclosure Document (“FDD”) early in the new year including changes in management, any new/updated litigation, and updated franchisee information in the ITEM 20 tables.

2)  Alert Attorney to Changes in FDD. Many franchisors find the renewal time to be a convenient time to implement changes to the franchise system, such as changes to franchisee fees, new marketing concepts to be implemented or changes to what franchisees can offer and sell. It is important to alert your franchise attorney to these changes so he/she can incorporate them in the FDD and determine if any changes present problems. I normally find that franchisors are evaluating various changes throughout the year and have alerted me to any proposed changes long before its time to start the renewal process.

3)  Evaluate Your Commitments. Take a look at your obligations under ITEM 20 of the FDD, the franchise agreement and any other agreements you have entered into with franchisees during the year. These obligations and agreements could require disclosure in the FDD. Also, this is a good time to review your franchise agreement, noncompete and confidentiality agreement, and area development contracts. I have found that many revisions to a franchise agreement emanate from a particular franchisee problem experienced during the year which needs to be avoided in the future.

4)  Review your Legal Matters. Include in your franchise renewal preparation other legal matters that might also need renewing. For example, do you need to file franchise renewals/exemptions in other states, have you filed your annual corporate statement in California, have business/professional licenses been renewed, and is your IP protections current and properly held/licensed?

5)  Don’t forget to update other Franchise Material. Remember that any changes to the FDD or franchise agreement will ripple into other areas such as your franchise promotional material, operations manual and website information. Make sure these other info channels are current and don’t contradict/misstate current disclosures in the FDD or franchise agreement.

6)  Make it Easy on the Examiner. In addition to timely making your renewal application filing, present the application in an easy to review format for the Examiner. During the renewal season, the Examiner has neither the time nor the inclination to review your entire FDD. So I typically identify in my application cover letter any significant changes that are included in the renewal FDD along with marked pages. Also, if there’s anything unusual in the updated financial statements or ITEM 20 tables, I’ll address them as well to avoid questions from the Examiner later. This allows the Examiner to quickly focus on just the changes and any issues upfront, and if acceptable, allows the Examiner to approve the application and send out that renewal order on or before the expiration date.

As always, our law firm is happy to discuss your franchising needs, whether as franchisor or franchisee, existing or contemplating.

Article by Roger D. Linn © Barnett & Linn

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