Materiality and FDD Amendments: What Every Franchisor Needs to Know
Business is a world in flux. With circumstances, processes, and dynamics constantly changing, franchisors need to be mindful of material changes and meticulous in amending their Franchise Disclosure Document (FDD) as required by the Federal Trade Commission (FTC).
What Does “Material” Mean?
The FTC defines a representation, omission, or practice to be material if it is likely to affect the consumer’s conduct or decisions with respect to the product at issue. In other words, a material change is one that a prospective franchisee would want to know while deciding whether to buy a franchise.
As a franchisor, you have to determine whether any changes in your business and/or industry fall within that description. If they do, you need to amend your FDD, during which you will not be able to sell any franchises until the document is updated.
The Two Questions to Ask Yourself
Legal speak can get very complex and confusing, so we want to keep the concept of materiality as simple as possible for the purpose of this article. To determine whether a change is material, ask yourself:
- “If I were looking to buy this franchise, would I want to know this?”
- “If I knew this, could it potentially impact my decision?”
When you put yourself in the shoes of a prospective franchisee, amending your FDD for material changes is as much a matter of ethics as it is law. You want to provide them with thorough, accurate information surrounding the current state of your business, so they can make informed decisions.
Common Material Changes in a Franchise
We’re not just talking about financial struggles, although they are certainly among the most significant material changes that prospective franchisees would want to know. All of the following are material changes that require amendment to your FDD:
- Updated franchise terms
- Increase or decrease in fees
- New royalty structure
- A new product or service
- Loss of market share to a new competitor or technology
- Change in management or ownership
- Pending litigation
- Decrease in franchisor’s income
- Obligation changes
- Limitations on goods and services
Any conceivable adverse change to a business can be added to this list, which is why the FDD is best considered a living document that may need to be amended.
What’s at Stake
If you fail to amend the FDD, a franchisee could have grounds to seek legal action and assert the FDD did not adequately address material changes. Soden & Steinberger, APLC can help ensure your FDD is up to date and in compliance with FTC and state requirements. Contact us to learn more about our legal services for franchisors.
