When advising clients concerning best practices in franchising, we discuss the importance of implementing a franchise compliance program to ensure the company remains in compliance with all federal and state disclosure laws and regulations. When implementing a franchise compliance program, there are four key aspects of compliance:

1. A franchise compliance program helps ensure the company’s franchise sales representatives are fully aware of the information they are legally permitted to share with prospective franchisees. This is a critical aspect of a franchise compliance program as failing to comply with the FTC Franchise Rule’s disclosure requirements opens the company up to potential federal and state actions against the company. In addition, actions can be taken against the company by a franchisee that was not properly disclosed or that was provided with information by the representative that was not permitted to be disclosed.
2. A franchise compliance program also helps ensure that the company’s Franchise Disclosure Document is kept up to date upon any “material change” (and at a minimum, annually) as required under the FTC Franchise Rule. A “material change” relates to any update or variation to the information disclosed in the Franchise Disclosure that may reasonably influence or is likely to influence a potential franchisee’s buying decision or a current franchisee’s decision to continue operating a franchise. This includes, but is not limited to:
   • Matters that may have a significant financial impact on the franchisor or franchisee
   • Litigation such as a lawsuit filed against the franchisor or its management team
   • Changes to the company’s management team or the ownership of the company
   • Changes to the franchise fee, royalty fee, brand fund fee, etc.
   • Changes to the estimated initial investment in Item 7 of the FDD.
   • New laws or regulations that may potentially impact the franchisor’s business or the franchise business system.
     
     In the event of a change that impacts the current disclosures in the FDD, franchisors should immediately consult with their franchise attorney for advisement as to whether the change is considered “material,” and therefore required to be disclosed in the Franchise Disclosure Document.
     
     
3.  The third aspect of a franchise compliance program is ensuring that state registration applications are amended and renewed on a timely basis. For example, state registrations must be amended when there is a "material change." At a minimum, registration renewals must be filed annually in the registration states.
4.  The final aspect of a franchise compliance program is maintaining important documents and records (electronically when applicable) for each franchisee and prospective franchisee relative to the offer and grant of a franchise as outlined below. This is extremely important as maintaining documents and records helps protect the franchisor in the event of any dispute with a franchisee.

Franchise Prospects Documents & Records

The following is a list of the documents and records that should be retained in the prospective franchisee’s file or their profile in the CRM system. Some of this information will be retained by the franchise sales representative(s) during the sales process. Franchise sales representatives should be informed of the information that must be maintained.

• The date that the prospective franchisee first contacted the franchisor to inquire about the franchise opportunity and the inquiry method (i.e., the Franchise Inquiry Form on the website).
• The date that “First Contact” with the prospective franchisee was made and the method (i.e., phone, web meeting).
• Notes and dates of all meetings and telephone conversations conducted with the prospective franchisee during the franchise sales process, including dates, nature of the interactions, key notes, actions taken, and information/materials provided to the prospective franchisee.
• Copies of correspondence and emails between the company/franchise sales representative and the prospective franchisee.
• Credit reports, criminal background reports, and other screening data used or obtained as part of the franchisee qualification process.
• Copies of forms completed by the prospective franchisee (i.e., Preliminary Consideration Form, Franchise Application).
• Signed and dated FDD Receipt.

Following the award of a franchise, the following documents and records should be retained in the franchisee’s file:

• Copy of the executed Franchise Agreement and all other related addenda, attachments and exhibits.
• The date and method by which the initial franchise fee was paid (i.e., check, wire transfer, ACH confirmation).
• Documentation of the franchisee's receipt of all required licenses, permits, and certifications relating to the franchise business.
• Proof of required insurance for the franchise business.
• Copy of the franchisee’s executed Lease and any related addenda.
• The dates and amounts of the franchisee's payment of Royalty Fees, Brand Fund Fees; Technology Fees, etc., and any products, materials, supplies, etc. purchased from the franchisor or its affiliate(s).
• Copies of all required reports, tax returns and financials statements (i.e., Gross Sales & Royalty Fee reports, advertising & marketing reports, financial statements, annual tax returns, sales tax returns, list of the franchisee’s employees, etc.).
• A log that tracks the franchisee’s participation in owners’ meetings, conferences, and other similar events.
• Copies of important correspondence with the franchisee.
• Copies of all written complaints made against the franchisee’s franchise business by customers and governmental agencies.
• Copies of inspection reports conducted by the franchisor and any governmental agencies.
• Copies of secret shopper reports.
• Copies of any “Breach Notices” or “Notice of Defaults” sent to the franchisee.

Franchisors are wise to implement a franchise compliance program immediately upon the commencement of their franchise expansion program.