Steps to Renew Your Franchise for 2025

As we approach the end of the fiscal year, it is time to renew your franchise. While no two franchisors are alike, all franchisor must renew their franchise each year. For new franchisors, this may come as a surprise, especially if you are awaiting registration in certain states. However, this article should serve as a useful guide for what you need to know for the 2025 Renewal Season.

Prepare Audited Financials Statements

The most important update to your Franchise Disclosure Document (“FDD”) is audited financials prepared by a certified public accountant. As a franchise attorney, I emphasize this because, in my experience, failing to provide audited financials on time is the leading cause of delays during renewal season. But what must I include in my audited financials?

For franchisors in their second fiscal year, you must provide an audited balance sheet as of the the end of the first partial or full fiscal year. Many franchisors match their fiscal year to the calendar. If you do, then you must provide an audited balance sheet as of December 31, 2024.

For franchisors in their third and subsequent years, you must provide a balance sheet for the past two fiscal years, a statement of operations, stockholders equity, and cash flows for each of the franchisor's previous three fiscal years.

Protect Your Branding

While uncommon for many second-year franchisors, as you begin to grow and develop, so too do your ideas for the brand. This may involve something as simple as using a new slogan or as drastic as a new logo. Regardless, it is important to assess what intellectual property you are licensing to franchisees and ensure it is covered in your franchise agreement.

Determine Your Key Personnel

As your franchise has grown, you have likely brought on additional staff and introduced new, key personnel. If so, those key individuals must be included in Item 2 of your FDD.

Who are “key personnel?” Anyone with management responsibility relating to the sale or operation of franchises. Naturally, this includes you as the franchise's President or Chief Executive Officer, but it expands to anyone with sufficient authority in franchise sales or management.

Review Your Fees

In my experience, prospective franchisees often scrutinize Items 5, 6, and 7 more than other sections of the FDD, and for good reason. These sections inform franchisees how they can expect to pay before and after establishing their franchise.

If you’ve been fortunate to have operational franchisees, you likely have a clearer understanding of the costs and timeframe a prospective franchisee can expect before becoming operational. While you have a legal obligation to provide accurate estimates, having accurate numbers can be more enticing to prospective franchisees.

This may also be a great time to reassess Item 5 and your initial franchise fee. Now that you’ve been in the market for at least a year, you better understand your competitors’ rates and fees. After one year, consider this: Did you sell as many franchises as you hoped? Are you not seeing as much cash flow as anticipated? Your initial franchise fee could be a factor.

Reconsider Your Market

Many new franchisors make the mistake of overextending themselves by registering in every state before generating any leads. The reasoning often goes: the more states you’re registered in, the more potential prospects. However, franchising requires much more than a valid FDD. In states with large markets—such as California, Illinois, and New York—you must pay registration fees and have your FDD approved by the state’s attorney general’s office. This process often involves multiple rounds of communication between your attorney and the AG’s office, resulting in additional legal fees that could be going to other areas of your business.

Prospective franchisees are primarily looking for a proven business model backed by a recognizable brand. For many new franchisors, their brand lacks consumer recognition outside their home state, making signing the first few franchisees even more challenging.

As renewal season approaches, evaluate where your brand has been most successful and consider focusing on natural growth in those areas before expanding further. Remember, 24 states do not require franchise registration or filings. Leveraging these states can be a strategic way to build brand recognition, test your system under less regulatory pressure, and generate capital. This approach is beneficial given that many franchise registration states require franchisors with insufficient capital to defer receiving initial franchise fees and royalty payments until the franchisee is fully operational.

If you have questions about franchising, our team at the Carmen D. Caruso Law Firm is here to help. Call the Carmen D. Caruso Law Firm at at (312) 626-1160 or email info@cdcaruso.com.