Why Do I Need to Keep Records?

Keeping records gives you an additional reason to check and make sure that the documents are properly completed and fully executed. If a dispute arises, incomplete documents can cause major headaches for franchisors. Having complete records is also vital to running your franchise and enforcing your agreements. Without proper records, you may not be able to prove the terms of certain agreements if they are later challenged. Even more importantly, franchisors are required by federal and state law to keep complete records of their franchise dealings. Violating those laws can result in fines going in to the tens of thousands of dollars, which we generally advise against (sorry, bad joke).

What Records Should I Keep and How Long Should I Keep Them?

When thinking of what records you should keep, there are three main categories to consider: records related to your FDD another other “registration” type documents; records related to your franchise sales and agreement; and “administrative” records. As you might expect, the more documents you retain and the longer you retain them, the more you protect yourself in the event disputes arise. There is far more to cover here than could possibly be done in a single blog, but we are happy to answer any specific questions you have about record retention as it pertains to your specific business.

Registration. You should retain all copies of your FDD (including state-specific FDDs if you have them) and amendments that are made it to it. Additionally, you should keep all documents related to the state registration, filing, or exemption process. This includes any documents you submit, comment letters sent or received, and copies of any permits or registrations received. Some examples may include Seller Disclosure Forms, Consent to Service of Process and audited financial statements. The Federal Rule requires you to retain a copy of each materially different version of your FDD for at least three years after the close of the fiscal year in which it was used. Some state laws impose longer record keeping requirements (up to 6 years). However, for maximum security, it is wise to retain all documents that a franchise sale was based on until the expiration of termination of that agreement.

Franchise Sales.  You should also retain all documents that were exchanged during the franchise sales process. If any of those documents contained signature lines, you should retain the signed copies of those documents. This includes the Franchise Agreement itself (you don’t want to be caught without a signed copy), any addenda or amendments, the Compliance Questionnaire, the Receipt of the FDD, and any communications (emails, letter, etc.) with the franchisee as these may be used as evidence in subsequent lawsuits. Like the FDD, the Federal Rule requires franchisors to keep copies of executed Receipts for at least three years. However, it is best to keep all documents related to the sale of a franchise until at least 3 years after the termination or expiration of the franchise agreement.

Administrative.  This last category is sort of a catch-all for any documents left out by the other two that would either 1) serve to protect a franchisor in case they ever needed to prove they were in compliance with state or federal law, or 2) provide the franchisor with information to help maintain compliance. These documents may include, but are not limited to, registration tracking information, jurisdictional triggering information, instructions for any state-specific procedures that must be followed, and a regularly updated list of all individuals who may offer or sell franchises in the state. Retaining these documents is not required by law, and therefore does not have a set period of time for retention. But, like the other categories, it is best to maintain them as long as they may apply to any franchise agreement currently in effect.

How Should I Categorize My Records?

Keeping records won’t do you any good if you don’t know where to find or access them, so it is important to develop strict filing controls and procedures among you and your staff to ensure documents are kept in the proper location. You could file them based on the categories listed above, or potentially based on client, state or both. At the end of the day, this is truly up to you, and you should do so in whatever way is best for you and your business.