If a "material change" occurs at any time after you furnish a prospect with the franchisor's FDD, the franchisor must update the FDD, and you must re-disclose the prospect with the updated FDD and re-observe all waiting periods.
A "material change" may be voluntary or involuntary.
Voluntary "material changes" include, for example, changes to any fee, the size of territories, territorial rights, any substantive term in any agreement in the FDD, the products or services offered by franchisees, the initial investment required or the franchisor's name, and may include changes to the franchisor's leadership team.
A lawsuit filed by the franchisor against a franchisee generally is not a material change that requires immediate updating and re-disclosure, even though the franchisor must disclose the lawsuit when it does its annual FDD update.
Involuntary "material changes" generally are negative, and include, for example:
- a significant legal proceeding brought against the franchisor or anyone on its leadership team;
- a significant deterioration in the franchisor's financial condition;
- a bankruptcy of the franchisor or anyone on its leadership team;
- a significant loss of franchisees in a state or nationally;
- the loss of an important trademark registration, or;
- a similar adverse development.
If you are concerned about whether a "material change" has occurred, check with the franchisor's lawyer or compliance manager before continuing to offer the franchise or having a prospect sign final agreements or make any payment to the franchisor or any affiliate.
You may be told that the FTC franchise rule does not require re-disclosure.
To some extent this statement is true. However, most state laws, as well as general state common law fraud principles, require re-disclosure.
(This was the ninth post in a series of 11 posts on making compliant franchise sales. )
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