In the franchise world, the old adage “if you’re not moving forward, you’re falling behind” applies. Franchise systems cannot remain viable and healthy without consideration of new products and services which add additional opportunities for profit, thereby enhancing brand strength. In so doing, franchisors need to be careful that they step back in a timely fashion with a jaundiced look to analyze their systems to see if they are in compliance with their own rules, regulations, and policies. Also, franchisees’ compliance is critical and that monitoring can start at the franchisor’s home office and not with a site visitation.
We all know that annual disclosure updates are required. Also, we all recognize that if there are changes to management, serious litigation or critical reversals of fortune, we need to cease franchise sales. But in a healthy franchise system, there are so many additional moving parts. The concept of periodic legal audit has merit and should be considered.
Let me pose some examples. With respect to registration states, franchisors are mindful of the deadlines, but do they always file the quarterly sales information required by certain states? Do they update their disclosure document with necessary post-effective amendments? If they exceed the number of sales in any state they have indicated in a given year, do they adjust that number? If a Financial Performance Disclosure Representation is made, has anything occurred since the most recent filing that would make it arguably inaccurate and potentially misleading? Relative to their trademarks, are there any new products and services requiring new trademark applications to be prosecuted? Are the marks being adequately policed to protect against infringers?
As to relationships with franchisees and mandating compliance, do franchisors have updated insurance information and certificates of insurance from all of its franchisees? Are their ops manuals consistent with current policy? Have revisions been submitted to the franchisees in a timely manner? Have these manuals been reviewed for any changes in the law? A perfect example at the moment is in the law of joint employment in relationship to the franchise world. New trends should mandate review of language in manuals pertaining to the level of control franchisors exercise relative to the employment activities of their franchisees.
If franchisors took the time and energy to critically monitor these activities, significant benefits would occur. First, annual renewals would run efficiently and could most likely be submitted to the regulators earlier in the renewal season resulting in quicker processing. Also, franchisees would understand the need for compliance with systems standards. Compliance would become the norm. Additionally, in this age of mergers and acquisitions, due diligence necessary to complete a franchise system sale would proceed more efficiently.
Is it time you had an outside legal audit?