Franchise financial assurance requirements are types of financial obligations that may be imposed on a franchisor by a franchise state regulator. These requirements may be set as a condition for registering your franchise disclosure document (FDD) or for renewing your FDD registration. Please continue reading to learn the franchise financial assurance requirements and how one of the experienced franchise acquisition attorneys at FortmanSpann, LLC can guide you through them.
What states impose the financial assurance requirements?
First of all, a state examiner may review the financial statements included in your FDD’s Item 21: Financial Statements. With this, they may conclude whether you possess an adequate amount of working capital to satisfy your pre-opening training and other support obligations to your franchisee. If they believe that you do not have enough funds, then they may impose financial assurance requirements. However, these requirements may be dependent on the state in which your franchise system is running. More specifically, the states that may enforce these requirements are as follows:
- California (CA).
- Hawaii (HI).
- Illinois (IL).
- Maryland (MD).
- Minnesota (MN).
- North Dakota (ND).
- Virginia (VA).
- Washington (WA).
It is worth mentioning that while other states may not impose financial assurance requirements, their examiners may still determine that your franchise system does not have enough capital. With that, they may require that you add risk factor information to your FDD state cover page.
What are the FDD franchise financial assurance requirements?
Once you confirm that you must follow financial assurance requirements, then you must proceed with grasping what these requirements exactly are. That is, you may be obligated to agree to one of the following:
- An initial franchise fee deferral requirement: here, you may agree to not collect an initial franchise fee until you execute your pre-opening training and other support obligations.
- An initial franchise fee escrow requirement: here, you may agree to deposit an initial franchise fee into an escrow account and collect it after you execute pre-opening training and other support obligations.
- A purchase and posting of a surety bond: here, you may promise that you will execute pre-opening training and other support obligations, all while collecting an initial franchise fee on time.
- Obtaining a performance guaranty: here, you may have another company confirm your financial and performance obligations to your franchisees and state, all while collecting an initial franchise fee on time.
- Infusing more capital into your franchise: here, you may use this new capital to submit updated audited financials so that the state examiner may reconsider their imposition of financial assurance requirements.
You must take these requirements seriously. So pick up the phone and call one of the skilled franchise law attorneys today. Someone at FortmanSpann, LLC will be happy to answer.