President’s Message - February 2017
By Matthew W. Nakon, Esq., President
Happy New Year and welcome to the latest edition of the Firm’s newsletter! We hope you find this issue interesting and helpful, as we have focused on franchises and the various practical and legal issues that arise in franchised businesses. I trust that the content will be useful for those looking for a franchising opportunity. WHP is well equipped to handle any franchising issue your business may face and I am very proud at the depth and experience that WHP can offer in this regard.
I’d also like to take a moment to welcome Chris Peer as a new shareholder and director of WHP. Chris is experienced in a variety of corporate areas, including mergers and acquisitions, bankruptcy, creditor’s and debtor’s rights and corporate finance. Recently, Chris and another one of our colleagues, John Polinko, were honored to receive the Turnaround Management Association’s prestigious “Turnaround of the Year” Award. We are very pleased to introduce Chris as a future leader of our Firm.
Later this month, fellow shareholder Phil Truax is co-hosting a free seminar with The Fedeli Group’s Construction & Surety group at Kalahari Resort in Sandusky — Protecting Your Bottom-Line: Payment Strategies for Contractors and Vendors. The seminar will be held on Friday, February 24, 2017. Registration and continental breakfast begin at 8:30 a.m., and the program runs from 9:00 am until Noon. If you operate in or around the construction or maintenance industries, we hope you are able to attend the seminar. Please contact our office to register.
Spring will be upon us before you know it, and that means the return of Tribe baseball and Cavs playoff basketball! Until then, if there is anything we can do to help you or your company, please give us a call. Here’s to a happy and prosperous start to 2017 from all of us at WHP!
Follow Us on Twitter
Follow us on Twitter @WickensHerzer for legal and news information helpful to you and your business.
Attention to Detail is Critical for Franchise Startups - February 2017
Starting a new franchised business can be an exhilarating experience, combining the thrill of engaging in a new business with the confidence that comes from having the backing of a successful brand. New franchisees, however, are responsible for mastering a significant amount of information in the early stages of the process.
First, the franchisor must issue to potential franchisees a Franchise Disclosure Document (“FDD”). Governed by the Federal Trade Commission’s “Franchise Rule,” the FDD is a lengthy document (often running several hundred pages), containing important information that the franchisor is required to disclose. My colleague, John Polinko, reviews some of the key specifics of an FDD in his article below.
The FTC requires disclosure of these material facts and franchisors must update the disclosures at least quarterly to reflect any material changes. Franchisors should be careful to fully disclose all material changes and all material information. Recently, transactions involving “insiders” without disclosure have drawn the scrutiny of the FTC. Similarly, franchisees should take note of any revisions to the required disclosures as it could highlight certain changes in the franchise system or expected financial results.
Next, the Franchise Agreement ultimately governs the relationship between franchisee and franchisor. Franchisors have significant bargaining power in this negotiation, but franchisees should understand this agreement in detail. The Franchise Agreement often imposes obligations on franchisees that are surprising once operations actually commence. Engaging your counsel to assist in this review is very important.
This is but sampling of the various issues a franchise start-up might encounter. Our Firm represents both franchisors and franchisees in the franchise process, so give us a call with any questions.
First Steps Toward a Successful Franchise Acquisition - February 2017
Owning a franchised business can present a lucrative opportunity, and this is especially true when acquiring a franchise with a history of success and/or an opportunity for growth. While each franchise system is different and carries its own set of complexities, there are generally three fundamental issues that every potential franchise owner should consider when pursuing the acquisition of an existing franchise location or opening a new location.
Formation of an Operating Entity. Operating any business in your personal capacity is fraught with problems and puts your personal assets at risk. Any potential franchisee should consider forming a business entity – often a limited liability company – to operate the franchise. In some cases, the franchisor may require the individual franchisee to sign the franchise agreement in his/her personal capacity, but would permit the franchisee to assign the operations of the franchise to the entity. We strongly encourage franchisees to form an entity before any acquisition is completed or even before any letter of intent is signed.
Obtaining Financing for the Acquisition. Aspiring franchisees may not have the liquidity to acquire a franchise with a lump sum cash payment. Engaging any potential lenders early in the process is essential. It is important to remember that, in most cases, the lender will require a personal guaranty of the individual franchisee. Banks may be willing to loan for the purchase price for a franchise, but will not provide working capital to cover initial startup expenses. Franchisees should be very aware of the cash flow of the franchise location, and any issues that might impact cash flow, such as seasonality. Many times an existing franchisee’s financial records may be lacking or incomplete, and it is important to complete your financial due diligence with the assistance of your advisors.
Real Estate. In the acquisition, the lease agreement governing the physical location of the franchise is a key component to the deal. Most franchisees are tenants in a space owned by a third-party landlord. Review of the existing lease agreement is another vital part of the due diligence process. The lease agreement will have a number of financial terms separate and apart from rent payment and it is important to understand those issues before seeking to transfer the lease as part of the acquisition. The landlord will likely need to consent to transfer the lease agreement to the new franchisee or may require the new franchisee to sign a new lease. Having the deal in place with the landlord should be a necessary condition to the acquisition of any existing franchise.
Developing a strategy with regard to these issues is a good first step toward a successful franchise acquisition. Please feel free to contact me for more information.
The Franchise Disclosure Document – A Brief Primer - February 2017
The scenario: You operate a prosperous business and believe that the concept can be successful in other markets. But given financial constraints or otherwise, you determine that franchising the business will likely result in the best return. You can envision the framework of franchising your business, but how do you present that to others. More specifically, what are you required to present to potential franchisees? Or, you have done your due diligence and are considering investing in a specific franchise opportunity. How do you learn the “nuts and bolts” of the franchise?
A Franchise Disclosure Document, or FDD, is a comprehensive (yet, single) document containing 23 specific items that must be “disclosed” to potential franchisees and touch upon all aspects of the franchise concept. The general idea behind the FDD is to ensure that a prospective franchisee is presented with all information related to the franchise concept, thus allowing the prospective franchisee to make an informed decision on whether or not to sign the subsequent Franchise Agreement and operate the franchise.
The expansive nature of the FDD makes it impossible to cover in a short article all that is required to be disclosed. For purposes if this article, however, it is helpful to note that a well thought out and informative FDD provides, among other things, the following items:
- Overview of type of franchise opportunity, the background and business experience of the franchisor.
- Financial stability of the franchisor (including financial statements), fees for operating and opening the franchise, including initial investment.
- Obligations of franchisor and franchisee, in addition to the future assistance to be provided by the franchisor.
- Locations and territories of the franchise, including the sourcing of product.
- Intellectual property rights of the franchisor.
- Any relevant litigation in which the franchisor is involved.
Franchising has a lot of upside, but it is not a simple venture. If one is truly interested in franchising a business, or seeking a franchising opportunity, it is imperative that experienced counsel be consulted to assist in navigating the process, from beginning to end. We can help.
Franchise Issues in Commercial Leases - February 2017
Commercial landlords and tenants are already faced with many issues during the course of negotiating a commercial lease agreement. When the tenant is a franchisee, the franchisor’s requirements (as outlined in the franchise agreement) add another layer of complexity to that process.
In some cases, with respect to the real estate, the franchisor may assist the franchisee in the franchise process, including selection of the franchise location and negotiation of the franchisor’s requirements in the lease agreement. Those requirements might also come in the form of an addendum or “rider” to the lease agreement. In either event, a Landlord inexperienced with franchisee-tenants may be hesitant to agree to franchisee’s (or franchisor’s) request to include the franchisor’s terms and conditions. Thus, it will be pivotal for the franchisee to educate the landlord and be tactful in its negotiation of the lease agreement.
For instance, one of the franchisor’s main concerns is protecting its brand. As a result, the landlord may be asked to agree to the franchisee’s specific terms relating to the interior layout, including build-out requirements, and external signage in the lease agreement. The franchisor may also require that the franchisee, without the consent of the landlord, be permitted to change various aspects of the leased premises during the term of the lease if the change is part of a national or state-wide franchisor re-branding campaign. From a general standpoint, the landlord probably won’t like that.
The franchisor may also request that it be provided with notices of the franchisee’s default and be provided with the opportunity to cure the same (which may benefit the landlord). Alternatively, the franchisor may call for the lease agreement to be assigned or transferred to another franchisee without the landlord’s consent.
If you find yourself negotiating a commercial lease when a franchise is involved, contact D.J. Swearingen or myself. We’re happy to help.
Be Aware of Possible Joint Employer Status with Franchisor - February 2017
The franchise model is built upon the idea that a franchisee pays for the right to use a franchisor’s brand, marketing and goodwill in launching and operating the franchisee’s business. The franchisee is generally responsible for its own business operations, including employment and legal issues. Recent decisions from the National Labor Review Board (“NLRB”) and the U.S. Department of Labor suggest it’s not that simple.
In the past, a franchisee’s employees were the sole responsibility of the franchisee. If an employee was mistreated, the employee’s sole recourse was to hold the franchisee liable. This model has been replaced instead with an analysis of whether the franchisee and franchisor both exercise control over the employee. If both franchisor and franchisee are determined to have some amount of control over an employee, they are joint employers and both are responsible for acts of the other. In determining whether the franchisor has such control, factors to examine include whether the franchisor (directly or indirectly) has the power to hire or fire employees, change employment conditions, or determine the rate and method of pay.
Most commentary on this change focuses on the potential damages to large franchisors. For example, imagine a scenario in which a fast-food franchisee of a large national brand illegally withholds overtime pay from its employees in violation of federal law. Prior to the recent NLRB and Department of Labor decisions, only that franchisee would be liable for the unpaid overtime. Now the national brand franchisor could be liable as well. While this scenario would seem to be of little concern to the franchisee, franchisees should evaluate how their actions could cause rifts with their franchisors, and what the impact of that may be under their franchise agreements.
It is reasonable to expect that franchisors will require greater documentation from franchisees regarding employee-treatment issues, such as the payment of wages, provision of healthcare, and general working conditions. Franchisors likely may conduct more frequent operations audits in order for franchisees to maintain their franchise licenses. In addition, franchisees who use temporary employees may incur similar liability. For example, a franchisee who uses temporary employees from an agency that mistreats its workers might find itself liable for that mistreatment.
For these reasons, franchisees should give extra scrutiny to the agreements they have with their franchisors and employment agencies. The agreements should carefully delineate the rights and responsibilities of the parties, and also establish what steps, if any, the franchisee needs to take to ensure it is protected from the liability of others.