2023 FDD Renewal Season is already here!

Nov 2

Yes, it’s already time to start thinking about your 2023 FDD Renewal - and that’s a good thing!

With the summer vacation season coming to a close many of our franchisor clients are reaping the benefits of the franchise “harvest season” – a prime time in early Fall for awarding new franchises to incoming candidates who are hunkering down and focusing on their next move. While we certainly encourage our franchisors to take advantage of this bumper crop opportunity – it’s also a great time to begin the initial planning process for your 2023 FDD renewal. Even though your 2022 FDD feels fresh out of the gate (and may still be awaiting registration in some states – I’m looking at you New York and Washington) – at least some of that renewed sense of focus brought on by the close of Summer should be channeled into prepping for the looming FDD update season. Here, we put together a list of practical considerations to keep on your radar between now and year end to ensure a smooth update to your franchise documents.

Prep Your Outside Auditors

While we’re still a full calendar quarter away from fiscal year end 12/31 – now is the time to either select your outside auditor, or touch base with them to make sure they’re aware of your audited financial statement needs for the upcoming year. If this is your first time engaging outside auditors for your franchise financial statements, this is the perfect time to get engaged so they can become familiar with your business before their busy season is in full swing. Even if you’re taking advantage of the “phase-in” of audited financials available to new franchisors, if you launched your FDD in 2022 - at a minimum you will need an audited closing balance sheet for year-end 2022.

***FAILING TO ENGAGE YOUR AUDITOR EARLY is by far the biggest reason we see franchisors experience delays in the FDD update process. If you need recommendations, we are happy to provide contact information for a few audit firms that specialize in franchisor financial statements. ENGAGE YOUR AUDITORS!***

Assemble the Empire

Updating your FDD every year is a collaborative process that includes input from various departments in your organization. For the Chief Everything Officers out there who are running new and emerging franchisors, you may be able to assemble your entire team at the family dinner table or by looking in the bathroom mirror. For larger organizations, key players are going to be your operations manager, franchise development personnel, marketing team, and executive leadership. Each department should be pinged for feedback on some key questions: What is in our FDD that is no longer consistent with how we operate? What challenges did we face in the sales process (e.g. “friction points”)? What terms in our franchise agreement sparked the most resistance? You’ll want to get input from all of these teams and start making a list to provide to your franchise attorney for changes you’d like to see in your updated 2023 FDD.

Crunch The Numbers

While the 2022 operating year is just entering the 4th quarter, now is also the perfect opportunity to look at Profit & Loss data for your corporate and/or franchised stores and start sketching out what you’d like to present in next year’s Item 19 Financial Performance Representation. While our goal with franchisor clients is to present a “Net Margin” or “EBITDA if Franchised” type Item 19 disclosure – it can also be very useful to franchisee candidates to have some historical data on key performance indicators for your operating locations. These “KPI’s” will vary widely by industry – but some examples include: (1) The average number of cars serviced per month by an auto repair shop and the average repair ticket price per service. (2) Average number of pre-sale memberships sold by your yoga/barre/cycling/pilates studio during their “Grand Opening period” and the average membership price. (3) Average service quotes/estimates per month for your home services business, together with average job closing rates and average service order price per customer. Your KPI’s are going to be hyper-specific to your business category and the data that you track on a regular basis. The key takeaway here is that an Item 19 can (and maybe should) be more than just P&L data!

State(s) of the Union

Thinking about state registration efforts for 2023 while some of this year’s registrations are still pending might be (is) frustrating, but now is the time to game plan around market penetration for the upcoming year. Get with your franchise attorney and they should be able to provide an overview of what it takes (and costs) to renew or process a new or renewal registration in any given franchise registration or exemption state. We’re always happy to provide a no-cost initial state overview consultation with prospective clients so feel free to reach out and we’d be glad to walk you through it.

Let’s Make a Deal

Speaking of your franchise attorney – now’s the time to get on their calendar as well for your 2023 FDD renewal. Engaging your attorney, or at least confirming you intend to renew with them, helps your franchise attorney appropriately plan and scale resources for the upcoming renewal season. This may also be a great opportunity to get a handle on your legal “back-office” to make sure you’re properly archiving your signed franchise agreements, marking deadlines for franchisee contract compliance, and any other system oversight tracking you need to be aware of. Many franchise attorneys may also be willing to discuss a flat fee arrangement for your FDD renewal so your costs for the renewal are predictable rather than based on a fluctuating hourly rate (hint, hint!). Engaging with your attorney earlier is much more likely to allow time to discuss a flat rate instead of hourly work for your renewal!

Creating Opportunity Out Of Obligation

Ever heard the story of the two lumberjacks? They start each morning and chop wood for twelve hours straight, sun-up to sundown. However, despite taking a 2-hour lunch break each day, one lumberjack still cuts down 25% more trees than the other. Frustrated, the first lumberjack asks his long-lunching colleague how he manages to constantly outpace him despite working far fewer hours every day. “Simple” says the second lumberjack – every day at noon I go home and kiss my children on the forehead, enjoy a delicious meal prepared by my loving wife, pet our loyal golden retriever, and take in the fresh mountain air. Awestruck and defeated, the lumberjack inquires “Is that it – is that all you do?!”. His colleague pauses for a moment to reflect as a knowing smile stretches across his lips, “Well that- and I sharpen my axe.”

Your annual FDD renewal is your chance to sharpen the axe on your franchise documents, clear out outdated information that is causing friction in your sales process, and prep for presenting the strong financial performance data that you and your franchisees have been working so hard on this year. As always, we’d be happy to assist in any way we can. Have a wonderful Fall and cheers to all of your success and hard work in the wild world of franchising so far!